Several investors invest in mutual funds through SIP mode of investment due to the several benefits it offers to individuals. Power of compounding, rupee cost averaging, disciplined investing, low minimum investment amount (as low as Rs 100 per month), no upper limit of investment amount, antidote to market volatility , no need to time the markets are just some of the benefits of SIP investment. It is believed that the longer one invests in SIP, the more benefits are they likely to receive. Why? Let’s understand why investing in SIP needs to be a long-term affair.
Power of compounding
One of the biggest benefits of investing in mutual funds through SIP mode of investment for a long term is the power of compounding it offers to investors. Compounding helps individuals to earn higher returns on their investments, as the gains are re-invested. In essence, your money works to make more money for you. To enjoy the maximum benefits of the power of compounding, it is advised to start investing as early as possible and stay invested for a long duration. The longer the duration of your investment, more are the benefits of the power of compounding.
Average holding period
If you invest in mutual funds via SIP mode of investment for a period of 20 years, then your average holding period of each SIP installment is barely 10 years. Why, you may wonder. This is because at the end of 20 years, just the first SIP installment would have finished the tenure of 20 years. On the other hand, the last SIP installment may or may not have even finished barely one month. In essence, even though you might have been investing for 20 years, the average time for your SIP investment would be merely 10 years.
There are several reasons why an investor might choose to discontinue their SIP investments and not complete the entire investment tenure that they had planned for their investments. Let’s quickly understand some of these reasons:
- Market volatility
One of the foremost reasons why an investor might end up discontinuing their SIP investments is the fluctuations in the market. Usually, an investor invests in SIP mutual funds with a hope of earning returns around 10-15% per annum. However, the probability of this happening is greater when you invest for a longer duration as the market volatility tends to even out when looked from a bigger picture. However, not every investor is able to grasp this concept. Several investors stop their SIP investments in mutual fund schemes mid-way when their expectations of higher returns are not met.
- Ease of redemption and transparency
Mutual funds are quite transparent in nature. As per the SEBI’s (Securities and Exchange Board of India) guidelines, all mutual funds are mandated to disclose the NAV of mutual funds on a regular basis. This is quite beneficial for the investors as they are well-aware about where their investments are made. However, there is a negative aspect to this as well – any negative news about the company or the markets creates nervousness and havoc in the markets, affecting the market sentiments. What’s more, thanks to easy redemption of mutual funds, investors tend to exit the markets at the slightest hint of deviation of returns.
Remember, when it comes to investing in mutual funds through SIP mode of investment, perseverance and patience goes a long way in creating significant wealth for your portfolio. Happy investing!