Why are SIPs more suitable for long-term investments?

Systematic Investment Plans (SIPs) are a convenient way for individuals to regularly invest small amounts of money and potentially build wealth over time. Investors can choose the instalment amount, frequency and holding period. Thus, SIPs make investing more affordable for individuals with limited financial resources since the initial SIP investment amount and instalment can be as low as Rs. 500.

However, when it comes to the SIP return potential, the holding period plays an important role.

Table of contents

• Average holding period of SIPs
• Reasons why SIPs are more suitable for the long term

Average holding period of SIPs

The average holding period of SIP investments can vary significantly among investors and is influenced by various factors such as investment objectives, risk tolerance, and market conditions. When investing in equity, the longer the holding period, the better. However, not all investors are disciplined enough to stay invested in the long term. According to SEBI, over 50% of mutual fund units of regular plans were sold or redeemed by investors in less than one year in 2022.

Reasons why SIPs are more suitable for the long term

• Rupee-cost averaging: Investors invest a fixed amount of money at regular intervals in an SIP, regardless of market conditions. Over time, this helps average out the cost per unit and mitigates the impact of market volatility on the SIP. For long-term investments, the effects are more pronounced.
• Power of compounding: SIPs harness the power of compounding, wherein investment returns generate additional earnings, which in turn generate more earnings. Compounding can boost the value of investments over long periods.
• Disciplined investing: SIP investments encourage disciplined investing by allowing individuals to contribute a fixed amount of money at regular intervals. This helps them develop a consistent savings habit and overcome the challenge of market timing or emotional decision-making.
• Investment flexibility: SIPs offer flexibility by allowing investors to start with modest amounts and gradually increase investments over time.
• Cost-effective investment: SIPs present a cost-effective investment avenue with lower entry amount as compared to other options. This cost efficiency makes it a suitable choice for those looking to invest without substantial initial capital.
• Long-term wealth growth: By leveraging compounding and rupee cost averaging, SIPs can prove to be a relatively suitable strategy for long-term wealth creation. The extended duration of investment allows these principles to work harmoniously, steadily building wealth over the years. An SIP investment calculator can help investors visualise this potential growth and understand how different investment parameters can impact their financial goals.

Conclusion

The probability of experiencing negative returns with SIPs depends on various factors, including the investment horizon, market conditions, asset allocation, and the underlying performance of the mutual funds in which SIP investments are made. Historical data suggests that over longer time frames, SIP investments have a higher probability of delivering positive returns and outperforming traditional investment options.

In conclusion, SIPs empower investors to take control of their financial futures and work towards potentially achieving their long-term financial goals. While short-term market volatility and fluctuations may lead to periodic negative returns, the long-term trajectory of the financial markets tends to be upward. The earlier investors start their SIPs, the longer their investments have to tap into the power of compounding and grow exponentially.
An SIP calculator can help investors see how the growth potential of their investment can accelerate with time through compounding. By inputting different investment horizons, they can see the resultant change in the potential final corpus. Do note, however, that the calculator's estimates are based on the inputs entered, and actual growth may differ from expectations.

FAQs

Can SIPs be started with a small amount of money?

Yes, SIPs typically have low entry barriers, allowing individuals to initiate investments with relatively small amounts of money. Investors can also consider a step up SIP, where there contributions are increased by a fixed percentage at regular intervals. Thus, they can start small and gradually increase their investments with time. A step up calculator allows you to visualize this potential growth and plan your investments.

How frequently can one invest in SIPs?

Some of the most common and widely available investment frequency options in SIPs in India are monthly and quarterly SIPs. Some mutual fund companies also offer daily and weekly SIPs.

Do SIPs offer any tax benefits?

SIPs, on their own, do not offer any specific tax benefits. The tax implications depend on the mutual funds in which SIP investments are made. Capital gains made from SIP investments are taxed according to the type of mutual fund scheme (equity, debt, etc.) and the holding period of the assets. If you hold a SIP for the long term i.e., more than one year for equity funds, they will be taxed under the Long-term Capital Gains (LTCG) tax category. Returns from debt funds are taxed based on your income tax slab.

Why does SIP focus on long-term investing?

SIPs are ideal for long-term investing due to their ability to harness compounding, mitigate market volatility through rupee cost averaging, and capitalize on long-term market growth. They help overcome inflation by investing in equities, which historically outpace inflation. By starting early and maintaining consistent investments, SIPs offer substantial wealth accumulation over time.

Can SIPs generate higher returns over the long term compared to short-term investments?

SIPs in equity funds offer higher potential returns over the long term due to the power of compounding, inflation-beating growth, and rupee cost averaging. While equity markets can be volatile in the short term, they provide significant growth opportunities compared to short-term investments like bank deposits or debt funds, which carry lower risks but also offer lower returns. Overall, SIPs in equity funds are better suited for long-term financial goals.

Why it might be beneficial to hold investments long term?

Holding investments long-term offers several benefits, including the power of compounding, which leads to exponential growth over time. Long-term investing helps mitigate market volatility, reduces the need for timing the market, and allows for rupee cost averaging. Additionally, it offers tax advantages and reduces stress, making it an essential strategy for achieving financial goals.

Are SIPs less risky for long-term investors than other investment methods?

SIPs are less risky for long-term investors due to rupee cost averaging, which helps reduce the impact of market volatility. By spreading investments over time, SIPs minimize the risk of investing a large sum at a market peak and encourage disciplined investing. However, market risk remains, and fund selection is crucial, as equity funds carry higher risks than debt funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.