What is a regular savings plan?

Key takeaways

• A regular savings plan (RSP) is to invest a fixed amount of money in a fund at regular intervals.

• RSP has four features: costs split and fluctuations irons out, disciplined investment to avoid pursuing rises and killing falls, long-term investment with compound interest, automatic implementation, and time-saving.

Understanding a Regular Savings Plan

A regular savings plan (i.e., RSP,  Automatic Investment Plan, AIP) is to invest a fixed amount of money in a fund at regular intervals. For example, you buy a specific fund of $200 on the 5th of each month. Its features are as below:

1. Split costs and irons out fluctuations

Unlike one-time investments, an RSP is a process of multiple investments with average costs. Due to that the amount of monthly investment is fixed, you will buy fewer units when the price of a fund is high and more units when the price is low, which achieves the desired effect of averaging costs.

2. Disciplined investment to avoid pursuing rises and killing falls

People's investment decisions are susceptible to emotions, so they might pursue rises and kill falls and buy high and sell low. But RSP is a disciplined investment implemented punctually to avoid changing long-term investment strategy due to temporary market fluctuations.

3. A long-term investment with compound interest

Every time you make a profit by an RSP, the profit will get into a new round of RSP and repeat this cycle. A long-term investment will achieve the power of compounding to accumulate a sizable wealth.

4. Automatic implementation and time-saving

There are many fund-selling apps nowadays (such as moomoo) supporting a customized RSP. The system will enforce automatic deductions punctually as long as you correlate them with your bank account. It is simple and convenient and you do not need to do it manually.

While the RSP has many advantages, it would be better not to enter the market when the price of a fund is high. Otherwise, it might take a long time to earn its cost.