The advantages of a regular investment plan
The Objective and Costs of a Savings Plan
How do regular savings accounts work? Setting aside a certain amount of money can be difficult, simply by saving something each month. Therefore, there are products on the market that can maximise the effectiveness of savings. On the one hand, there are the regular investment plans. On the other hand, there are the regular savings plans. Both of these plans are managed by authorised companies known as asset management companies.
A regular investment plan – What is it? The regular investment plan is a form of savings plan, i.e. a form of pre-planned investment. This plan consists of a method for subscribing to a share of a financial product (usually a mutual fund) issued by banks or asset management companies (AMCs).
Using the most classic example, the saver who takes out a regular investment plan regularly pays an amount which is used for the continuous purchase of units in an investment fund. It’s a form of savings that was developed primarily for private investors who can’t set aside large amounts of capital but are willing to gradually invest in a financial product. As with every financial product, the investment plan has certain costs, such as asset-based and management fees.
There are several advantages to taking out a regular investment plan, in particular:
However, based on the risk profile, the basis of financial instruments invested in varies significantly. For example, it can be a bond fund for a low risk profile, or a mixed fund or an equity fund if you prefer a higher risk.
As we have seen, there are certainly good reasons to opt for a regular investment plan, but it’s also important to highlight two aspects when entering into a regular investment plan:
Savers who opt for an investment plan regularly pay in a fixed amount. The investment plan generally involves participation in an investment fund or similar product. Let us then take the example of the investment fund. Corresponding fund units are automatically purchased for this amount at the current price. As a result, the saver acquires fund units at an average price over the course of the year, which has been proven to be a lower-risk investment than a one-off purchase with the same sum of money. This form of saving goes hand in hand with all the features of an investment fund, for example with regard to costs (asset-based fees, as well as redemption, administration and performance fees) or the periodic return mechanism.
Investment plans from small amounts per month are widespread. This form of savings is particularly attractive due to the possibility of participating in the development of the stock markets with small amounts, even if it entails a higher risk compared to other savings plans. When you pay into a fund savings plan, you invest your own capital in the financial markets. That means you have a higher risk/opportunity profile.
This type of savings involves the saver committing to pay sums to a bank or building society on a regular basis over a defined period of time. Typically, the sums range from £10 to £500 per month and must be paid over a period of no less than 10 to 11 months. The advantage for the saver is that the bank (or the building society) agrees to provide interest on the amount paid in, which is higher than the interest that would accrue on a simple bank account1. Normally, you have to open a current account at the bank providing the savings account you are interested in, in order to set up for it. As with many other forms of savings, it is important to always check under what conditions it is possible to withdraw the money paid in.
There are also other types of savings plans that depend, for example, on the composition of an investment portfolio (e.g. a stock savings plan or a sustainable savings plan). A variant of the fund savings plan that’s in high demand is the ETF savings plan. This functions as a ”passive” investment fund, i.e. it tracks a stock market index such as – for example – the Ftse 100 or Xetra Gold.
In the UK, there is a form of savings that allows for attractive tax advantages. It is a rather versatile form of saving: Individual Savings Accounts (ISAs)2. There are at least four types: a) cash ISA, b) stocks and shares ISA, c) innovative finance ISA, d) Lifetime ISA. This allows savers to save through multiple categories of financial products: shares, bonds, investment funds, but also alternative finance instruments (i.e. peer-to-peer loans). This instrument can be underwritten with a wide variety of institutions: from banks to building societies, from stock brokers to credit companies.
Compared to one-off investments or simple savings accounts, savings plans offer a personalised and long-term investment. Of course, it is also possible to set up a short-term savings plan, if the intention is to procure an amount for a particular or an extra expense or else to have a sum set aside quickly in case of an emergency. It can also be added that a savings plan can also be useful to combat the effect of inflation. One of the necessary conditions for a savings plan to work effectively is to clarify one's financial goals3. If you open a savings plan, however, you should pay attention to the fees, because they can have a strong impact on returns.
1 https://www.moneyhelper.org.uk/en/savings/types-of-savings/regular-savings-accounts
2 https://www.gov.uk/individual-savings-accounts/print
3 https://www.ybs.co.uk/savings/short-and-long-term-savings/index.html
Related topics In this article, we mentioned other topics that you may find useful to explore:
Financial investment risk
ETF
Diversifying investments
Behavioural finance
What are financial markets?
