What are the steps for creating a systematic investment plan for mutual funds?

Question

I believe that any investment done systematically should be termed as a systematic investment plan. However, the term systematic investment plan is mostly understood as systematically investing a fixed amount of money in your favorite funds.

So how does one start a systematic investment plan in funds? While there is a lot of information available on what is an SIP, I am still confused about how to start one. I am looking for the steps that one should follow to start an SIP. Something on the lines of :

1. What are the different types of funds that you can add to your SIP.
2. How to choose funds?
3. What to do once you have chosen your funds? Do you go to some website and select the funds and how much money to put in each fund each month and then link your bank account to the website so money is automatically invested each month?

The above steps are just an example of what kind of information I am looking for. Feel free to add more steps/information as you please.

Answer 1

Here would be the general steps to my mind for creating such a plan:

1. Write out the final desired outcome. Is it $x in y years to fund your retirement? Is it $a in b years to put as a house down payment? This is the first step in defining how much money you want at what point in time.

2. Consider what is your risk tolerance and how much time do you plan on spending in this plan. Is it rebalancing once a quarter and that's it or do you plan on doing monthly research and making tweaks all the time? This is slightly different from the first where one has to be mindful of how much volatility would one handle and what time commitment does one have for an investing strategy. Also, how much money would you be adding to the investments on what kind of time table would also be worth noting here.

3. Construct the asset allocation based on the previous two steps along with historical returns averaged out to be a first draft of what you are buying in general. Is it US stocks? Is it a short-term bond fund? There are more than a few choices here that may make sense and it is worth considering based on the first couple of responses that determine what this will look like. Retirement in 40 years may be quite different than a house down payment in 2 years for example.

4. Determine what brokerages or fund companies would offer such funds along with what types of accounts you'd want to have as in some countries there may be tax-advantaged accounts that may be useful to use here. This is where you're almost ready to start by doing the homework of figuring out how will things work. This may vary depending on one's jurisdiction.

5. Get the applications from whatever institutions you'll be using and run with the desired asset allocation across various funds and accounts. Note that in the first few steps there were points of being aware of how much would you have, how aggressive are you investing and so forth. This is where you actually send in the money and get things rolling.

6. Run with the plan and make tweaks as needed to achieve result, hopefully desired or better.