How long should you invest in SIP? All you need to know

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 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 fulfil. 

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.

Consult an expert advisor to get the right plan for you