A Systematic Investment Plan (SIP) is a facility offered by mutual funds to investors to invest in a disciplined manner.Read this to see if you have the right time horizon for your investment
A systematic investment plan (SIP) — a method of investing in mutual funds — offers the potential for high returns. However, it is very important to choose the SIP duration carefully.
When talking about duration, investors often confuse SIP holding period with investment holding period. The point here is that some mutual funds only have a SIP holding period of his 3 years, but you can extend them and hold them for a longer period of time.
So what should be the ideal time horizon for an investment?
Whiteoak Capital Mutual Fund (MF) has produced some data showing returns for 3-, 5-, 8-, 10-, 12- and 15-year SIP terms. They are based on the S&P BSE Sensex TRI and show a median return, a positive percent-fold return, a percent-fold return of 8% or more, a 10% and 12% return.
You can see the results here:
These returns are for SIP from September 1996 to September 2020, as stated by WhiteOak Capital. The data shows that the longer the investment horizon, the more likely you are to get a positive return.
A longer tenure averages out investment peaks and troughs, while a shorter tenure offers higher rewards but also higher risk.
Factors to consider before investing
Investing via SIP is recommended for first-time investors and those who require a certain amount of financial discipline. Bulk investments may expose the investor to the risk of capturing market peaks, whereas SIPs allow investors to spread their investments over time and invest at different market levels.
SIPs are a great way to accumulate mutual fund units regularly and over market cycles to generate long-term wealth.
First publication: IST