How long should you invest in SIP?
In the previous article, we discussed investing in the 30s. In this article, we will discuss how long should you invest in SIP.
SIP (Systematic Investment Plan) is a method of investing that requires consistency in investments, even if the amount is small. It focuses on time and requires the compounding cycle to continue without any breaks.
If the investment is made in a SIP format, the investor can take advantage of rupee-cost averaging over the long term to gain better returns on average.
Periodic investment also reduces volatility and can help in accumulating a sizeable corpus. SIPs usually allow you to invest weekly, quarterly or monthly.
An important question that plagues the topic of discussion is the duration of your SIP. Though it is a subjective question that depends on person to person, is there some ideal duration for running your SIP?
To answer the above question, we must understand that SIP is not an investment instrument, but it is a way to invest your money, opposite to a lumpsum investment.
What is the ideal duration to invest in SIP?
Ideally, the longer you stay invested, the better it will be to grow your wealth because of the cost of investment averaging out in the long term.
Another essential thing to keep in mind is that the period of your SIP can be different from your holding period. For example, you might stop your SIP after five years but remain invested for 10-15 years.
Investments in mutual funds, stocks, etc., do not require you to pull out your capital from the market immediately after your tentative investment period is over. The investment period will depend upon the goals and objectives that you aim to fulfill.
For example, if you are investing to buy a car, you may need to save for 3-4 years depending upon the monthly payment you plan to make. Your retirement planning needs more careful consideration, given that a considerable amount is required compared to usual expenses.
Benefits of long-term SIP investment strategy
According to the Value Research team, SIPs can be said to be truly safe for close to 4 years and above. The study found that, on average, the risk of loss when an investment is undertaken for more than four years (investment done with due diligence) is negligible.
Interestingly, the risk of loss and the chance of a high windfall gain is higher in the short run.
Over long periods, the maxima and the minima get averaged out. For example, consider the following fund with a multi-decade history; overall possible one-year periods, the maximum and minimum returns are 160% and 57%, respectively.
For two years, it is 82% and 34%. Over five years, 54% and 4%, never meaning a loss. Over ten years, the maximum is 30%, and the minimum is 13% (all annualized figures).
Thus, the comparison is obvious – the shorter the period, the higher the potential gain, but the worse the possible risk.
We get a good answer from the above data: we must carry on our SIPs for at least 3 to 4 years; some lumpsum additions in between can be beneficial for your portfolio.
It is vital to keep your investment objective in mind while deciding how long you wish to run your SIP.
Is it good to invest in SIP for 20 years?
Yes, 20 years is a good long-term horizon to stay invested in SIP. The longer you stay invested, the better the returns on your initial investment.
When should I quit SIP?
If a fund is consistently underperforming, it might be a good reason to stop investing. Another reason could be that the mutual fund and its performance no longer meet your financial goals.
This is why it’s important to revisit your portfolio and update it so that it can align better with your financial goals.
Is it OK to start investing at 30?
Yes, it is a good idea to start investing at 30 years of age. It is never to late to start investing your money towards your financial goals. You can consult a SEBI- registered financial advisor and get the best advice to make a success.
How can I build my wealth at 30?
Here are some ways to build your wealth at the age of 30-
- Create an emergency fund
- Become debt-free
- Align investments with life goals
- Beating inflation
- Do not fear risk
- Do not disregard liquidity
- Invest continuously
Consult an expert advisor to get the right plan for you
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