Of course, it's pretty simple to invest in fixed-income instruments like recurring deposits, fixed deposits, public provident funds, voluntary provident funds, etc. The rate of interest is fixed and there's no need to bother about the time frame for how long you should stay invested as every fixed-investment comes with a lock-in period.
However, these options lead to a failure in generating inflation-beating returns and, hence, not very likable investment options to achieve your long-term financial goals. This is where you must turn towards a systematic investment plan or SIP to invest in mutual funds so you can earn fruitful and inflation-adjusted returns to meet your long-term goals.
Here is the discussion on time period through which you need to invest for in SIP mutual fund. What SIP stands for, let's learn it first
What is SIP?
An SIP is actually an investment instrument offered by the AMCs wherein you as an investor may opt to make bit-by-bit periodical investments in a mutual fund scheme of your choice instead of opting for a lump sum investment route. The SIP mode allows you to determine the amount you can invest in a mutual fund based on your cash inflow. An SIP offers many benefits to you as an investor such as easy investment of small investible amount as low as Rs 100 to generate higher returns, compounding effect, rupee cost averaging feature, etc.
How long should you stay invested in the SIP mutual fund?
The SIP mutual fund investments provide a good potential for earning higher returns on your market investments. However, in order to enhance your potential of earning higher returns, you have to be very cautious while determining the SIP duration. Read on to know how you should decide the SIP duration for your mutual fund investment.
Depending on your financial goals
The best way to calculate the SIP duration is by setting the SIP based on the financial goals. For example, if you wish to create an X corpus in 10 years so that when the time comes to pay your child's wedding expenses, it wouldn't come as a burden then it says you have 10 years more to allow your investments to grow.
Here, you should be very much aware of the fact that since it is a long term financial goal, you must invest for it as early as possible. In this way, you will be able to accumulate an adequate corpus with lesserly monthly investments.
What is more, keeping your investments for the long term in SIPs would enable your investments to recoup from market volatilities, if any and generate higher returns due to the compounding effect.
You can make use of an online SIP calculator that would help you to calculate your precise monthly SIP investment based on your cash inflow and the time horizon of your financial goal.
Considering the wealth accumulation factor
The biggest challenge is in accumulating long-term wealth, particularly for life after retirement is inflation. Now, with SIP mutual fund investment, you can actually manage to curtail the impact of inflation. If your main objective is to generate enough wealth over a considerably long time line that is more than a decade then you can go for the top-up SIP mode as and when your income improves.
The longer you keep your money invested in the market, the more likely are your chances of generating higher returns through SIP equity investment. The reason being that equity as an asset class has the tremendous capability 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. Because SIP fetches the benefit of compounding, which means that your interest earned on an SIP is invested back along with the initial investment to build a higher corpus over the long run.
In addition to this, an SIP also lets you make the maximum utilization 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 lets you continue with your market investment regardless of market movement.
Note that, you can derive the highest benefit in SIPs only if you stay invested for the long-term i.e., 5 years and above because equity investment is very volatile in the short term. The only way to manage volatility is to remain invested for the long-term because your investment would get longer time-period to grow and recoup from the market volatility, if any.
