How long should you run your SIP?

Investing in fixed-income instruments like recurring deposits, fixed deposits, public provident funds, voluntary provident funds, etc. is quite easy. The interest rate is fixed, and you do not require worrying about the timeframe of how long you should remain invested as every fixed-investment come with a lock-in period. However, such options fail to generate inflation-beating returns and thus, are highly unsuitable investment options to meet your long-term financial goals. Here’s where you must turn towards a systematic investment plan (SIP) to invest in mutual funds for fruitful and inflation-adjusted returns to meet your long-term goals. Discussed here is the time duration you must consider remaining invested in SIP mutual fund. However, before this, let’s understand the meaning of SIP.

What is an SIP?

An SIP is an investment instrument provided by the AMCs (Asset Management Companies) wherein you as an investor can select to make bit-by-bit periodic investments in a mutual fund scheme of your choice instead of opting for a lumpsum investment route. Depending on your cash inflow, you can decide the amount that you can invest in a mutual fund through the SIP mode. An SIP provides a lot of advantages to you as an investor like the ease of investing small investible amount of as low as Rs 100 to generate higher returns, compounding effect, rupee cost averaging feature, etc.  

For how long you must remain invested in an SIP mutual fund?

SIP mutual fund investments present a high possibility of earning higher returns on your market investments. But to improve your potential of earning higher returns, it is important to select the SIP duration very carefully. Read on to understand how you must determine your SIP mutual fund’s duration.

Based on your financial goals –

The suitable way to determine the SIP duration is to base it as per your financial goal. For instance, suppose you want to accumulate X amount of corpus after 10 years to meet the expenses of your child’s marriage. This means you have 10 years left to allow your investments to multiply over time. Here, it is important for you to understand that as it is a long-term financial goal, you must begin investing towards it as soon as possible. Doing so would allow you to accumulate an adequate corpus with smaller monthly contributions. Also, keeping your investments in SIPs for the long term would allow your investments to recoup from market volatilities, if any and generate higher returns owing to the compounding effect.

You can use an online SIP calculator to compute the accurate monthly SIP investment as per your cash inflow and financial goal’s time horizon.

Based on the wealth accumulation –

One of the major hurdles in building long-term wealth, particularly for post-retirement life is inflation. With SIP mutual fund investment, you can minimize the impact of inflation. If your main purpose is to create adequate wealth over a long time period i.e., over a decade, then you can choose the top-up SIP mode as and when your income increases. The longer you allow your investment to remain invested in the market, the higher your chances of generating higher returns through SIP equity investment. This is because equity as an asset class has the potential to deliver inflation and fixed income beating returns by a wide margin over a long time period.

Ending note

So, when you invest in an SIP, ensure to invest for a longer time horizon. This is because an SIP offers the benefit of compounding, which means your interest earned on an SIP is invested back along with the initial investment to generate a higher corpus over the long run. Besides this, an SIP also allows you to make the most out of the rupee cost averaging feature wherein higher units are bought during a falling market and lesser units are bought during a rising market. This process of averaging out your investment cost allows you to continue with your market investment regardless of the market movement. Note that, you can reap the highest benefit in SIPs only if you remain invested for a long-term i.e., 5 years and above as equity investment over the short term is highly volatile. The only way to managevolatility is to remain invested for long-term as your investment receives longer time-period to grow and recoup from the market volatility, if any.