Automatic Investment Plan (AIP)

How much money do you need to make profits in the stock market? Take a guess. Some believe that investing in the stock market requires thorough knowledge, efforts, risk-taking abilities, and a huge amount of money. While it may not be completely wrong, there's a way through which even investors with less knowledge and little money can create long-term wealth.

This is no get-rich-quick scheme or illegal trading. It is a simple and time-tested strategy that has proved effective. Introducing to you: automatic investment plans. You may know them by their more common name: systematic investment plan.

Meaning of AIP

An Automatic Investment Plan is an investment method that permits you to invest a small amount of money regularly, instead of a lump sum, in the mutual fund of the investor's choice. The process of AIP involves direct deduction of the predetermined amount at regular intervals. which can be weekly, monthly or quarterly. It is deducted from the investor’s bank account and invested in the mutual fund scheme selected by the investor.

Investors can decide the interval according to their convenience and investment objectives. The amount can be as little as Rs.500.

How does an AIP work?

To start investing via AIP, an investor is required to fill up the application form with details like the mutual fund scheme, amount of investment, regular interval period, and a particular date on which the amount will be deducted, according to his/her investment goals, for an investment. The investment amount can be auto-debited either via paycheque or a personal bank account. On the date specified by the investor, the corresponding units of particular funds are purchased at the rate prevailing in the market.

The number of units allocated varies based on the Net Asset Value (NAV) of the scheme. NAV is an indicator of the performance of a scheme. It is calculated by subtracting the total value of liabilities from the value of total assets and then dividing the amount by the total number of outstanding units.

The investments are managed by professional fund managers, who charge a nominal fee. This fee is specified in the scheme’s document but is not a big burden to investors since the expenses are distributed among everyone that’s invested with the manager.

AIP for individuals

When an individual investor opts for AIP, you’re choosing to keep investing with discipline. Since you pay yourself first before spending, you usually build a large investment corpus in the long run. Investors consider it as a part of their routine budget and prevent themselves from spending more. There are various Automatic Investment Plans for individuals such as Retirement Account Automatic Investment Plan, Brokerage Account Automatic Investment Plan, Dividend Reinvestment Plan, etc.

Final Words

AIP can be summarized as an investment program that involves very few efforts and less risk to investors. It is one of the best methods of investment for beginners and encourages the discipline of savings and thus, builds long-term wealth.

Frequently Asked Questions Expand All

AIP accompanies various benefits like starting investment with as little as Rs. 500, fewer efforts and risks involved and it also inculcates the habits of disciplined savings amongst amateur investors.

The process to set up an AIP is pretty simple. It starts with selecting a fund of choice and determining the investment amount. Once they are decided, an investor has to decide the regular time interval for deductions and the date at which the money is transferred from the bank account to the fund.