For long-term wealth creation in India, investing in mutual funds through SIPs (Systematic Investment Plans) has become one of the most prevalent and successful strategies. SIPs give investors the ability to systematically accumulate wealth by allowing them to invest a certain amount into the mutual funds of their choice at frequent intervals, usually every month.
This consistent approach harnesses the power of compounding and rupee-cost averaging, ensuring that even small, regular contributions can grow substantially over time. As a result, SIPs have emerged as the go-to investment choice for anyone looking to build wealth gradually and without taking on excessive risk.
Investing in SIPs has the advantage of offering rupee cost averaging and the possibility for higher returns when compared to traditional investment options like fixed deposits. With so many SIP plans available in 2024, it will be challenging for investors to select the best one for their specific requirements. Thus, it’s critical to comprehend the significant features and advantages of the several SIP plans on the market.
Using SIP to grow mutual fund portfolio
Match your financial objectives with the mutual fund: Each person in every age group has unique financial needs, which leads to distinctive financial goals. Therefore, it is preferable to match your mutual fund SIPs to your investing plan based on both short- and long-term financial objectives. For instance, when investing for a long-term goal like your retirement corpus, it is advisable to use SIPs that include equity mutual funds.
Avoid hustles: Since the markets are typically quite intense and volatile, it is normal for Net Asset Values (NAV) to fluctuate regularly. That being said, when markets fall, there’s no reason to panic and sell mutual funds. You can reap the benefits of rupee cost averaging if you continue to invest for 1–3 years for short- and midterm goals and more than five years for long-term ambitions.
Focus on long-term goals: A minimum three-year investment to a particular mutual fund is advised for those making investments in SIPs with midterm or long-term goals, such as retirement planning or financing a child’s education. One can see that returns typically increase in the third or fifth year by looking at the performance of mutual funds over one year, three years, and five years. The compounding effect, which increases growth over time, is responsible for the rise in returns. Thus, in order to optimise the returns on SIP investments, patience, and a long-term outlook are essential.
Advantages of SIP investing
Power of compounding: Compounding in the context of investing in mutual funds is the interest or earnings on your investment gains. Regularly made investments have the long-term advantage of compound interest, which helps the investment grow and yield respectable returns. Your mutual fund receives a monthly investment when you initiate a SIP. Depending on the amount invested and the current net asset value of the fund, investors acquire shares in the form of units. If NAV is high, fewer units are assigned. In the same way, investors in mutual funds receive more units when the NAV is low.
Rupee cost averaging: When an investor makes consistent, fixed-amount investments at predetermined times, rupee cost averaging is achieved. Thus, in times of low price and significant price volatility, the investor will purchase more shares of the investment. By averaging your unit costs, the rupee cost averaging effect lessens the impact of transient market swings on your assets.
Ease of investing: An important step in accumulating wealth is to make steady investments. A further advantage of SIP is that it regularises your investment. In addition, you can establish ECS on your bank accounts and make arrangements for a fixed deposit amount to be sent to SIP funds every month. It is easy to automate your assets; otherwise, given the pressures of daily life, most people tend to forget about them.
Harnessing SIPs in 2024!
Offering the benefits of both compounding and rupee-cost averaging, SIPs provide a great base for tracking wealth over time in India. In 2024, with a great deal of change in the investment environment expected and many investing opportunities, individuals must adopt an organised way of going about mutual fund investments to gradually achieve varying financial objectives
Nitin Shahi, Executive Director of Findoc
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Published: 02 Jan 2024, 10:26 AM IST