Do SIPs and Long Term Investments Go Hand in Hand?

We as hard working individuals love to be rewarded with incentives and bonuses. What if we told you that you can increase your chances of rewarding yourself by making smart investments? A lot of people aspire to attain financial stability but they do not realize that they need to first get started with financial planning. Financial planning should be considered by anyone who wants to improve their existing financial status. To begin with financial planning, individuals should first understand their short term and long term financial goals. An individual’s financial goals may vary depending on their age, income, existing liabilities, etc. Individuals are requested to not mimic the financial goals of their peers and to set realistic goals in order to chart out a feasible investment plan.

Once you have made a list of short term and long term financial goals, the next thing for an investor to do is determine their risk appetite. A risk appetite is nothing but an investor’s ability to bear financial risk with hope of benefiting in the long run. Every investment scheme carries a different risk profile and it is exactly why investors should understand their risk appetite. You do not want to invest in a scheme that is beyond your risk appetite as there are chances of your portfolio incurring losses.

Investors with zero risk appetite generally settle with investment schemes offering fixed interest rates. However, these investment schemes offer low interest rates and may not help an investor getting closer to their goal. However, if you are seeking capital appreciation through market linked schemes and looking to give your investment portfolio an aggressive approach then you can consider investing in mutual funds.

What are mutual funds?

In the recent past, mutual funds have become an investment vehicle for Indian investors. A lot of individuals are considering investing in mutual funds as they are known for offering capital appreciation in the past. What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. The money is invested depending on the investment object and risk profile of the scheme. A mutual fund allocates assets to several money market instruments including equity, debt, government securities, corporate bonds, call money, certificates of deposits, etc.

Mutual fund investors receive units. Investors receive units in quantum with the money invested and depending on the fund’s existing NAV (net asset value). A mutual fund’s performance generally depends on the performance of its underlying assets.

What is SIP?

Those who seek investment in mutual funds have two payment options – they can either make a lumpsum investment or they can start a mutual fund SIP using an Mutual fund app. Usually people who have surplus cash parked with them consider making a lumpsum investment in mutual funds. One good thing about lumpsum investment is that investors receive mutual fund units in large quantities depending on the fund’s current NAV. However, those who wish to remain invested in mutual funds for a long period of time may consider starting a mutual fund SIP.

Systematic Investment Plan or SIP is an easy and hassle free process to continue investing in mutual funds for a longer time period. If you want you can start a mutual fund SIP from the comfort of your smartphone or laptop, but you need to be a KYC compliant individual to do that.

Do SIPs and long term investments go hand in hand?

SIP is supposed to inculcate the habit of regular investing in an individual. Those who wish to fulfil long term financial goals like retirement planning or buying a new house, such individuals need to build a decent corpus over a period of time. In order to build such a large corpus, on may have to remain invested in mutual funds for the long run. If you start a mutual fund SIP, it helps you invest small amounts at regular intervals. If you are committed to your investments and do not miss out on making regular investments in mutual funds, you might be able to get closer to your ultimate financial goal. Also, investors who choose SIP investment over lumpsum, they stand a chance of benefiting from the power of compounding. Also when you start a mutual fund SIP, your investments are adjusted depending on the fluctuating NAV. When the NAV is low, investors receive more units and similarly when mutual fund NAV goes up, investors receive lesser units. This is also referred to as rupee cost averaging.

So if you have a long term investment horizon and wish to build a decent corpus through mutual funds, do consider starting a systematic investment plan. However, if you are entirely new to mutual fund investments and feel that you need further assistance, do seek the advice of a mutual fund expert.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.