Mutual Funds

Ideal time for running an SIP

Last week the Tarrakki research team met some investors. While engaged in the discussed, the team asked for the investor for a specific set of questions to understand his risk appetite and objective.

After the long discussion that lasted for about 60 odd minutes, there were few conclusions the team drew.

In this blog, we seek to discuss some of the key findings of what a layman thinks of investment, Systematic Investment Plan, Mutual Funds, and the tenure of investment.

Read on!

It was an ordinary evening in Ahmedabad when we had a client at the Tarrakki office. While engaged in the discussion around financial investments, and planning, we asked the usual questions an advisor would ask to know the objective/purpose of investment. Surprisingly the investor had no specific goal in mind and to be honest; he was mending himself the way the team interrogated. All, the investor knew was ‘SIP Karna hai.’

Let us see a few questions and answers before we move to the theme of the blog –

  1. How long can you remain invested?
    1. Three year
  2. So, you need money in three years?
    1. I don’t need it until retirement.
  3. What’s the purpose of money after three years?
    1. I want to try mutual fund as everyone says it is a great instrument to make quick money.

One interesting thing we observed was that after every question, the investor would stare at us thinking if we would suggest him SIPs at all. We believe this lack of right education or financial awareness is the root cause and let us try to clear some of these.

SIP is not an instrument

Systematic Investment Plan (SIP) is not an instrument for investment. It is just a method by which an investor can invest in mutual funds. By employing SIP, you can invest in mutual funds at a regular interval (every month, quarter, etc.). This process helps you sail through the market turbulence while lowering the cost of investing in the long run. The fundamental principle behind SIP is buying across market mood (upmarket and down-market) so that you do not need to try timing the market, which in reality isn’t possible. If you remain invested for the long term, the cost of investment tends to go down, thereby resulting in wealth creation.

SIP period and investment holding need not be the same

Investors often get confused between SIP tenure and investment holding period. This is because they are more aware of the working style of fixed deposit and recurring deposit. Please, remember both are different.

In mutual funds, you may have a SIP for three years, but it is not necessary to redeem your investment after three years. You may hold on to your investments for a longer period, such as 20 years.

Thus, there are two key takeaways from this –

  1. It is not mandatory to redeem your investments at the end of your SIP period. Investments in mutual funds do not mature like FD/RD, but an investor needs to redeem to withdraw capital.
  2. It is not mandatory to have a three-year or five-year SIP horizon similar to that of RD/FD. You may always choose a different period based on your objective.

Start your SIP today, register now at Tarrakki.

Ideal SIP Tenure

How long should you continue with your SIP purely depends on the objective for which you are investing and the asset allocation you have selected. For example, if you are investing for buying a car and choosing hybrid funds, you may need to save for 3-4 years until when you will either have the down payment accumulated or the entire amount collected depending on the monthly contribution.

Now, assume you are aged 23 years, and you are planning for your retirement. You think you need Rs 5 crore when you turn 60 and you can invest Rs 5000 per month now, then you can always invest in equities (particularly small-cap, given you, have a longer horizon to invest). Assuming 18% average returns in the small-cap equity space, you don’t need to run your SIP until 60 years as your goal would be accomplished much earlier when you enter the 50s (28-year SIP, refer to the chart below).

28-year SIP Chart
Source: Tarrakki Research

Similarly, if you have a short-term goal such as buying an iPhone XI and you cannot spare much sum, you may need to invest regularly through 1-2 years to accumulate the money. In this case, the money should be invested in comparatively, safer debt funds.

So, we can say that the horizon of SIP should not be read in standalone and should be in sync with your objective. If you are the one who is not having any goal such as retirement, buying a house, foreign trip, and the likes, you may indulge into SIP to have a proper discipline towards your savings habit.

Also View: How to Achieve Financial Independence with SIP?

Can you choose SIP with shorter tenure?

Of course, you can have SIP with shorter tenure. But before you jump into one remember the following two –

You will not be able to average out your investments in equity funds effectively unless you are lucky that you see period like 2008 or 2010 during that 1-2 year. SIPs work best in the long-term such as over 5-7 years.

People think they would witness the performance by investing in shorter-term SIP and continue for long. But in reality, this never happens.

Do I need to continue SIP even if the fund is not performing well?

We understand your concern around lock-in. But SIP has nothing to do with lock-in as it is only a means to invest in funds. If your fund is not performing well, you can always change the fund and/or stop the SIP.

To conclude, we can say that SIP is a great way to invest and accumulate wealth. It is a great tool that inculcates the discipline of investing within you and helps you average out your cost of investment. SIPs are merely a tool, and an investor should stick to the basic fundamental of investing that says one should align investments to each of the financial objectives so that none of the goals are compromised.

Should you wish to know more, feel free to drop in a line, or walk into our office. To start a SIP, register with Tarrakki today.

SIP Karo, Tarrakki Karo!

Also Check: Mutual Fund for Child Education

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