What is the Right Duration for a SIP?

Investing was easy when it was just about FDs, RDs, gold, stocks, etc. The rate of interest was fixed, and you do not have to worry about the tenure of the deposit either. However, it failed to produce inflation-beating returns in most cases. Since the inception of the mutual funds and Systematic Investment Plans (SIPs), investments have become more fruitful for many but also require a bit more engagement on your part.From deciding the kind of mutual fund scheme, the amount to be invested every month, and the duration for which you would want your money to remain invested. This last bit has confused people over the years.Before we learn how to decide upon the tenure of the SIP, let us first understand what SIP is.

SIP or Systematic Investment Plan is a type of investment tool offered by the Asset Management Companies, where the investor can choose to make periodic investments into a mutual fund rather than making a lump sum investment. Based on the money invested, the investor gets units of a fund at its current Net Asset Value (NAV). SIPs offer a lot of benefits to the investor, such as rupee cost averaging, ease of investment, etc.

Typically, there are 4 different types of SIPs available, as mentioned below:

1. Top-up SIP In this, you can put increase the SIP amount at periodic intervals. It is great for people who are expecting a rise in their income and wish to alter their investment strategy automatically.
2. Flexible SIP Depending on your cash flow, you can increase or decrease the investment amount. It is of great help if you are under a deficit and wish to skip a couple of SIPs.
3. Perpetual SIP Unlike the SIPs which come with a pre-decided end date, Perpetual SIPs do not require you to put an end date. This gives you the flexibility of withdrawing your amount at any point in time or when you think you have achieved your goal.
4. Trigger SIP This type of SIP enables you to alter the SIP amount and plan based on certain triggers such as index level, etc.

You can find all the relevant information and details about every mutual fund scheme online. However, it is important to consider the following key aspects before choosing one.

1. SIP’s Duration The duration of a SIP is directly related to its returns, tax, and risks involved. You must take into account the performance of any fund over 5 years.
2. Mutual Fund Entity The reputation of the entity that is offering the mutual fund makes a lot of difference. It tells you about how capable the entity is, and its fund managers , to manage the highs and lows of the market, without letting the investors feel the heat.
3. Asset Under Management There are several mutual funds available in the market today. All of them will try to lure you into investing with them by providing lucrative offers. However, as per the experts any fund with a minimum of Rs. 500 Cr. asset under its belt is the safest for creating wealth. While there are funds with smaller asset size, their performance might not be at par with the funds with 500 crores or above asset size.

SIP investments present a tremendous possibility of earning high returns on your investments. To further improve your chances of amplifying the earnings, it is extremely vital to choose the duration of your SIP carefully. Read further to find out how you can decide on that.

Based on Goals

1. The best way to decide upon the duration of your SIP is to base it according to your goal. For example, suppose you want to have an X amount of money after 20 years to fund your child’s education. That means you have 20 years to let your investments grow and multiply. It is important to understand here that you cannot keep investing continuously for 20 years. Instead, you will have to make provisions for a buffer period to give yourself time to mitigate losses incurred during a bad year.You can also make use of the SIP Calculator to back-calculate important numbers like monthly investment amount, the total investment required, and above all for how long you must invest. This will further help you in avoiding any last-minute surprises or shortfalls.
2. Based on Wealth Accumulation For most people, the biggest hurdle in creating wealth is inflation. SIPs can help you diminish the effects of inflation. If wealth creation is your main purpose, you can choose to invest in a top SIP for a longer duration. The longer you let your investment remain untouched, the higher your returns will be. The main reason behind having longer tenures is that it evens out losses.
3. Based on Experts’ Advice – According to expert fund managers, investment in any SIP gives fruitful returns only when it remains invested for five years and above. This minimum period ensures that losses if any, become minuscule. A longer tenure averages out the crests and troughs of the investment. On the other hand, shorter tenures can give you both high rewards and high risks.For example, a regular fund with a proven track record, the annualised maximum return is 160%, and the minimum is -57% for one year. Further, for two years it becomes 82% & -34%, and for a period extending 5 years, it is 54% & 4%. If your risk appetite is not too high, and you wish to minimise or remove the loss completely, then consider the latter to be your investment tenure.

You can stop making the SIP payments or alter them depending on your financial situation, goals and other factors. There are 2 key factors to be noted here.

1. Do You Wish to Make More SIP Payments but Remain Invested: In this, you stop making further SIP payments but don’t redeem the fund.
2. Do You Wish to Exit from the Fund: In this, you not only stop making SIP payments, but you also redeem the fund.

In either case, you should make a data-driven decision after examining a few factors.

1. Fund’s Past Performance: In case you see the fund is not able to perform well, you may choose to exit the fund or stop making further investments. However, as mentioned before, investing in mutual funds, especially equity funds, should be done keeping long-term goals in mind. Thus, exiting purely based on a few bad weeks or months performance, exiting may not be a prudent choice.
2. Your Goals: As you age, your goals may change, or you may have reached your goals. You may choose to go from a more aggressive strategy to a more passive strategy where you wish to consolidate the earnings by reducing the risk. In such a case, you may choose to change the SIP or invest the earnings in a different plan.
3. Change in the Fund’s Investment Approach/Strategy: Fund managers may alter the investment strategy of a fund which may not be in line with your goals and your risk appetite. If you see this, it may be right to exit from a SIP and look for a new SIP that matches with your goals and risk appetite.

When exiting from a mutual fund, do take note of the exit load. Some funds charge a certain exit load for exiting before a certain duration.

To create wealth through SIP investments , tenure of a minimum of 5 years is recommended by a majority of experts. However, you must decide based on the factors mentioned above. Perpetual SIPs allow you not to set an end-date to your investments but yet stop it any time you wish to.

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.