How long-term SIPs can optimise equity return potential

Despite the diverse investment opportunities presented by mutual funds, risk-averse investors may be wary of them because of the fear of market volatility. However, with adequate planning and research, investors can identify how to make the optimal use of these funds to reduce risks and increase the potential to build wealth. One such strategy is making long-term investments in equity mutual fund through Systematic Investment Plans or SIPs. This article will explain how investments in equity funds can offer better return potential than those accrued from short-term schemes.

• Table of contents

1. What are equity funds?
2. Understanding long-term SIPs
3. The role of SIPs in equity investing
4. What is the advantage of long-term equity SIP returns?

What are equity funds?

Equity funds are a mutual fund type where at least 65% of the scheme’s assets are invested in stocks and shares. As these funds are dependent on the stock market’s performance, they are considered to carry a relatively higher risk than debt funds. However, when managed well, they have the capacity to offer better return potential over long term than traditional savings instruments such as fixed deposits or a provident fund.
Additionally, investing in the equity mutual fund such as a flexi cap fund can help you mitigate risks by diversifying your portfolio as compared with concentrated equity investment – which means that you don’t have to rely on the fate of just a few stocks, as your investment will be diversified across large, mid, and small cap stocks.

Understanding long-term SIPs

A long-term SIP (Systematic Investment Plan) is an investment method through which you regularly invest a fixed amount of money into a mutual fund, typically over several years or even decades. This approach aligns with long-term financial goals like retirement, a child's education, or wealth creation.

Key features of long-term SIPs:

1. Regular investment:
   • Fixed intervals (e.g., monthly, quarterly) and fixed amounts.
   • Helps in disciplined saving and investing.
2. Compounding effect:
   • As your investments grow, the returns are reinvested, potentially leading to compounded growth over time.
3. Rupee cost averaging:
   • Because you invest a fixed amount, you buy more units when prices are low and fewer units when prices are high. This averages out your investment cost.
4. Reduced market risk:
   • Long-term investing reduces the impact of short-term market volatility, as markets tend to stabilize over time.
5. Flexible and accessible:
   • You can increase, decrease, or even pause contributions based on your financial situation. Redemptions are usually possible, though it's recommended to stay invested for the long term.

The role of SIPs in equity investing

SIPs (Systematic Investment Plans) play a crucial role in equity investing by offering several key advantages:

Reduced risk of timing the market: SIPs save you the trouble of trying time the market. You invest consistently regardless of market conditions, benefiting from both upswings and downturns.

Equity markets and economic growth: Equity markets tend to grow in line with the overall economic growth of a country. Over the long term, the Indian economy has demonstrated strong growth potential, and equity markets have historically* delivered positive long-term returns despite periods of volatility and recession.

*Past performance may or may not be sustained in the future.

Reduced stress: Knowing that you are consistently investing towards your future goals can provide significant peace of mind and reduce financial stress.

What is the advantage of long-term equity SIP returns?

Easy instalments: SIPs are a great way to develop a saving habit without incurring a large financial burden. Depending on your expenses, income, and investment priorities, you can set aside just a few hundred rupees a month or put in larger amounts. You can also increase or decrease the size of your instalments depending on your income and expenses over the years. In comparison, a lump sum investment requires you to set aside a significant amount, which may not be feasible for everyone. Even when you have an SIP, you can always add lumpsum amounts to the mutual fund whenever you have some surplus cash.

Rupee cost averaging: Investing through SIPs in equity funds can help you better leverage market fluctuations because of the phenomenon of rupee cost averaging. Let’s say that you invest Rs. 1000 a month via SIP. When the market is down, the value of shares dips, which means that you can purchase more units for this amount. When the market rises, the per-share cost goes up, and you purchase fewer units for Rs. 1000. In the long term, this may reduce the average amount you spend per unit, and this could help the long term equity SIP returns recover after dips in the market. With lumpsum investments, you miss the opportunity to benefit from rupee cost averaging. The SIP route also saves you from the trouble of constantly tracking the markets to determine the best time to invest.

Power of compounding: This is another reason why long-term equity SIP returns can be beneficial. Compound interest has a multiplier effect on savings because the interest earned on a certain principal gets reinvested, effectively increasing your principal amount. The next year, your interest is calculated on that increased principal, resulting in further gain, and so on. The application of compound interest is direct in the case of savings tools such as fixed deposits where the interest rate stays the same throughout your tenure. In the case of mutual funds, which don’t have a fixed rate of earnings, this translates a little differently. The earnings may rise sharply one year and then dip the next. But over a longer period, such as seven years or more, returns are likely to stabilize again, and the compounding effect of the average annual growth rate may yield potential gains.

Conclusion:

Making long-term investments through SIPs has the potential to increase equity returns and reduce the risk associated with the financial market. The increased duration can help you withstand market volatility. Plus, you can invest in small, easy instalments, which can help you build a corpus gradually but steadily. When planning your investments, you can take the help of an SIP calculator online. This tool can help you strategise your investments by estimating potential returns based on the amount you intend to invest, the investment horizon, and the expected rate of return.

FAQs:

What are long-term SIPs in equity?

Long-term systematic investment plans (SIPs) involve investing fixed amounts regularly in equity funds for an extended period, promoting disciplined investing.

Can a fund with lower NAV be better than a fund with higher NAV?

Yes, there is a possibility that funds that have given higher return over a period, have lower NAV than the one’s with a higher NAV. Any fund’s performance depends on the returns provided over a period and not the current day NAV.

How do long-term SIPs impact equity return?

Consistent investments over the long haul can help mitigate market volatility, potentially leading to reasonable equity returns due to rupee cost averaging.

What are the risks associated with long-term SIPs?

Despite potential benefits, SIPs are subject to market risks, and returns are not guaranteed. Fluctuating market conditions may impact returns.

How to choose suitable SIPs for maximizing equity returns?

Evaluating fund performance, expenses, and investment objectives is essential. Diversifying across funds and staying invested for the long run is crucial for better returns.

What are the benefits of long-term SIP investments in equity funds?

Long-term SIPs in equity funds leverage the power of compounding, allowing wealth to grow significantly over time, especially when started early. They also use rupee cost averaging, reducing the impact of market volatility by investing consistently regardless of market conditions. Additionally, SIPs promote disciplined saving and offer the potential to earn inflation-beating returns over time.

Can SIPs increase equity returns over time?

SIPs enhance equity return potential over time through compounding. Compounding allows returns to generate additional returns, while rupee cost averaging enables you to buy more units when the market is down and fewer when it’s up, averaging your purchase cost. This approach, combined with consistent long-term investing, can potentially lead to significant wealth creation over time.

Why should I invest in equity funds for the long term through SIPs?

Investing in equity funds through SIPs for the long term offers numerous advantages, such as the power of compounding, rupee cost averaging, and long-term growth potential. Compounding amplifies return potential over time, while SIPs help mitigate the impact of market volatility and reduce the need to time the market. Additionally, equity investments can outpace inflation and promote disciplined savings.

What is the role of SIP calculators in planning long-term equity investments?

SIP calculators are essential tools for planning long-term equity investments by helping investors set goals, evaluate different scenarios, and understand the impact of their decisions. They allow you to quantify financial goals, visualize potential investment growth, and experiment with variables like SIP amount and expected returns to assess different potential outcomes. Additionally, these calculators educate investors on compounding, the benefits of starting early, and integrating SIPs into broader financial plans.

How much should I invest in SIPs to optimise equity return potential?

The suitable SIP amount varies based on individual factors like income, financial goals, risk tolerance, and investment horizon. While a general guideline is to invest 15-30% of income, it's essential to start small, prioritise consistency, and adjust contributions as income or goals change. Regularly reviewing your SIP investments and maintaining a long-term perspective are key.

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 an 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.