Why are SIPs more suitable for the 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.
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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.
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.
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.
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 (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.
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.