What is The Ideal Tenure of SIP Investment?

Thinking of jumping onto the Systematic Investment Plans (SIP) bandwagon to grow your hard-earned money? A great idea! SIP is one of the best ways to accumulate wealth in an affordable and sustained manner through mutual fund investment.However, certain aspects of SIP, especially the ideal tenure of investment, can confuse a newbie. No worries, we've got you covered. Let's start by shedding some light on the nitty-gritty of the popular investment route.

Contrary to widely-held belief, SIP is not a product but a simple and flexible mode of investment. It is a process through which you can invest a fixed amount in mutual fund schemes to help build impressive corpus overtime. The set amount gets debited from your account at the selected frequency (weekly, monthly, or quarterly). Since competent fund managers manage these mutual funds, you don't have to fret over which securities to buy, hold, or sell.The basic principle behind SIP is investing at different price points (allocating more units in a falling market and less when it's thriving). As a result, the SIP route helps beat the market mayhem and lowers the overall cost of acquisition thanks to rupee cost averaging. Not to mention, it is a good investment option for rookies since it inculcates discipline and doesn't require frequent tracking of financial markets.

Another misconception investors have about SIP's is regarding their tenure. They believe that the SIPs duration and investment horizon are the same when they are different in reality. For instance, if you start a monthly SIP investment of Rs. 5,000 for 3 years, you are not bound by the original choice made regarding SIP’s tenure. It’s not mandatory to redeem the investment after 3 years.You have the flexibility to increase or decrease the initial period depending on your financial status. In fact, you have the option of renewal and continue the investment uninterrupted for 20-25 years to accomplish your long-term goals. And yes, if the fund's performance is unsatisfactory, you can also pause or discontinue your SIP at any time you wish by intimating the asset management company (AMC) in advance. The invested amount will keep earning returns until you put in a redemption request. Thus, stopping a SIP is not the same as exiting from the mutual fund.

Coming to the difficult question, what is the ideal time frame for investing via the SIP route? Is it six months, two years, or even longer? There is no thumb rule for how long the SIP investment should run. The duration should preferably be in sync with your financial goals.Bear in mind that each goal, such as retirement, home loan, or child's education/marriage, etc., is distinctive and will have different time frames. Once there is clarity on that front, you can decide on the appropriate asset allocation and tenure for its attainment. Let's elucidate this fact with three major life goals.

Let’s say you are 31 years and need a retirement corpus of 1crore for comfortable living after you hang your boots. Assuming the CAGR to be 12%, here is how long your SIP should be based on the expected return rate.

Thus, you’ll need to invest ₹2861 per month in SIPs for 30 years if you wish to build a corpus of 1 crore. However, if you don't have that much time, you can opt for the higher SIP of ₹10,108 per month for 20 years to build the corpus.

Given that this is also a long-term goal, you need to consider the child's current age, the number of years remaining for college, your financial status, and the current inflation rate. Assuming you aim to build a corpus of ₹25 lakh for your 5-year old child's higher education, you will have around 20 years. Again assuming the CAGR to be 12% on your investments, you'll need ₹2,527 per month.

What if you need to save for a foreign tour, down payment of a car, or buying the latest gadget? Since you are looking to meet short-term goals investing in hybrid funds, liquid funds, or low-duration debt funds is a good option. With a maturity period of 6-12 months, these mutual fund schemes provide steady returns with high liquidity at low risk.

SIPs work best if you are in for the long haul. Financial experts generally recommend SIPs for a minimum period of five years to exploit the benefits. It takes about that time for the investment to get a grip and average out market fluctuations. The long-term perspective helps in over-riding the impact of market volatilities, experienced most in the medium and short-term.Moreover, it allows the power of compounding to amplify the returns on your investment. However, it must be noted that these are just guidelines, and it's always best to consult a professional for expert advice before taking the final call.So, what say, ready to adopt the disciplinary approach of planned investing via the SIP route?

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.