Investing in Equity Mutual Fund SIPs: A Long-Term Perspective

Hell yeah.

SIPs, or Systematic Investment Plans, have been a real blessing for individuals who may not have the time or expertise to analyze the complexities of the stock market. The process is simple: you provide your money to a fund manager, who handles your investments and manages the risks. I started SIPs in 2020, and it has been a rewarding journey so far. I have switched a few mutual funds from index to small-cap and sectoral funds as per my risk tolerance. While investing, it's always a good idea to seek advice from experienced individuals, such as your father, to manage your risks effectively.

Recently, mutual funds have become increasingly popular with investors. More and more people are opting for SIPs to invest in mutual funds. For instance, in August 2022, mutual fund SIP accounts rose to 5.72 crores. SIPs are a convenient way to invest in mutual funds without manual intervention. Despite their benefits, one common question that arises is how long should one stay invested—three years? Five years? Ten years? We will address all your burning questions in this article.

Understanding the Average Holding Period

The first factor to consider when investing via SIPs is the average holding period. Let's take a look at an example. If you invest for 20 years via SIPs, the average holding period for each installment is just 10 years. Here's why: at the end of 20 years, the first installment would have completed 20 years, while the last installment might have completed only one month. Hence, while the investor has been investing for 20 years, the average holding period is just 10 years. It's essential to consider the average holding period rather than the initial date of investment to determine the actual investment tenure.

The Power of Compounding: A Superhero for Long-Term Investors

One of the significant advantages of investing via SIPs is the compounding effect. Compounding is the process where the returns earned on an investment are reinvested to generate additional earnings over time. To illustrate why long-term investments are more rewarding, let's consider an example:

Example of SIP Investment

Suppose you start an SIP investment of ?10,000 per month at different times, with a conservative expected rate of return of 10% per annum. Here is a comparison of the returns:

Time Period Additional Investment (?10,000/month) Value after 6 Years Value after 9 Years Value after 12 Years Value after 15 Years First 6 Years ?720,000 ?613,061 ?782,452 ?1,058,796 ?1,485,635 7th Year ?10,000 ?707,002 ?886,896 ?1,162,575 ?1,617,892 8th Year ?10,000 ?791,106 ?984,964 ?1,280,805 ?1,808,668 9th Year ?10,000 ?866,275 ?1,091,391 ?1,399,699 ?2,036,516 10th Year ?10,000 ?933,440 ?1,206,388 ?1,523,098 ?2,436,651 11th Year ?10,000 ?1,003,867 ?1,329,728 ?1,657,010 ?2,935,877 12th Year ?10,000 ?1,077,428 ?1,463,009 ?1,803,523 ?3,557,853 13th Year ?10,000 ?1,153,128 ?1,610,184 ?2,064,103 ?4,417,234 14th Year ?10,000 ?1,231,965 ?1,774,795 ?2,342,945 ?5,720,653 15th Year ?10,000 ?1,313,954 ?1,958,433 ?2,642,175 ?7,690,083

As we can see, for the same additional investment of ?10,000 per month, the incremental value increases at a much faster rate as the investment period increases. For example, after 15 years, the incremental value has increased by 7.69 times over the additional investment of ?720,000. In contrast, it is only 1.56 times in 6 years.

Overcoming Market Volatility and Short-Term Incentives

Despite the benefits of long-term investing through SIPs, people may not stay invested for longer periods due to market volatility, a lack of satisfaction with short-term returns, and the ease of redeeming their investments. However, unless there is an urgent need for the investment due to an emergency, it is advisable to stay invested for as long as possible. The power of compounding rewards long-term investors with significant growth over time.

To conclude, investing in equity mutual fund SIPs is a valuable strategy that can provide long-term benefits. It is essential to understand the average holding period and leverage the power of compounding to maximize returns. Long-term investments not only help overcome market volatility but also provide significant growth over time. If you are looking for a platform that can assist you in starting your investment journey, consider Koshex. It provides personalized suggestions and helps you build a personalized investment profile.

Note: The above example is for illustrative purposes and does not reflect actual financial performance.