SIP in Mutual Funds: How to Pick a Suitable Investment Tenure

Systematic Investment Plans (SIPs) are a popular way to invest in mutual funds. They allow you to invest a fixed amount of money regularly, helping you potentially build wealth over time through affordable instalments.

However, identifying a suitable investment horizon for your SIP in mutual funds is essential – your return potential is linked to the time for which you stay invested. Choosing a tenure isn’t just about your preference, it’s about aligning your investments with your goals, risk tolerance, and financial capacity.

Here’s a simple guide to help you with this process.

Understand your goals

First, your investment tenure depends on your goal. Ask yourself: What am I investing for? Are you saving for higher education, buying a house, or retirement?

Short-term goals: If you’re saving for something like a vacation, some big purchases, or to build an emergency corpus, you may have a short tenure of one to three years.
Medium-term goals (3–5 years): For goals like buying a car, starting a business, or saving for a wedding, you may have a medium-term horizon.
Long-term goals (5+ years): Goals like retirement or funding your child’s higher education, you may have a long investment horizon of seven-10 years or more. A home purchase can be a medium or long-term goal, depending on when you start investing.

For short-term goals, lower risk options like debt mutual funds are usually recommended. For medium-term goals, you can consider hybrid funds (that combine equity and debt) or large cap mutual funds that provide a mix of relative stability and growth potential. For long-term goals, equity mutual funds can be a suitable choice. They have the potential to deliver higher returns over time, though they come with short-term volatility.

Consider your income and cash flow

The amount for your SIP in mutual funds should be manageable based on your monthly budget. So, your tenure may also depend on how much you can comfortably set aside without affecting your essential expenses.

If you can set aside a modest sum every month, you can potentially achieve your goals in relatively lesser time.
If you want more affordable instalments, you may choose a long horizon so that you can benefit from the potential snowball effect of compounding over time. Compounding happens when investment returns are reinvested to potentially generate additional returns. The longer you stay invested, the more accelerated impact of compounding may be.

Factor in inflation

Inflation reduces the purchasing power of your money over time. When deciding the tenure for your SIP, consider how inflation might impact your real returns.

For instance, if your goal is to accumulate money for your child’s education 15 years from now, you’ll need to consider the rising cost of education. A degree that costs Rs. 20 lakh today may cost much more in 15 years. So, you may need to start investing well ahead of time.

Assess liquidity needs

Consider how easily you might need access to the invested funds. If you might need liquidity soon, a shorter tenure with lower/moderate risk funds like liquid or short-term debt funds are better suited.

Evaluate potential returns

If you invest in avenues that offer better return potential, you may achieve the same goal in a shorter tenure. On the other hand, low risk and low return investments may require longer tenures to achieve the same targets. For example, an investor comfortable with equities may be able to potentially achieve a certain goal amount in seven years. A conservative investor choosing traditional avenues or fixed income funds may need a longer horizon for the same amount.

Review and adjust

Your financial situation and goals can change over time. It’s important to review your SIP investments periodically. If needed, you can adjust the tenure, top up your SIP amount, or even switch funds to stay on track with your goals.

Step-up SIP: Grow your investments with time

Once you’ve identified a horizon, you can further optimise return potential or work more efficiently towards your goals with an SIP step-up. This facility allows you to increase your SIP by a fixed rate periodically, typically in line with your income growth. It’s a convenient way to boost your investments without feeling the pinch.

For instance, if you start with a SIP of Rs. 5,000 and step it up by 10% annually, your contribution will grow to Rs. 5500 in the second year, Rs. 6050 in the third year, and so on. This can help you accumulate a larger corpus over time, even if you start with a modest amount.

Step-up SIPs are particularly useful for considerably long-term goals like retirement planning, where you can start with an affordable instalment and gradually increase your contributions. An SIP step up calculator can help you envision the potential impact that this steady increase can have on your investments. Based on your starting SIP amount, step-up rate and frequency, investment tenure and expected returns, this tool estimates the potential size of your corpus. You can also compare the potential returns with and without step up SIPs.

By carefully choosing your investment horizon and considering tools like step-up SIPs, you can enhance your investments and work more strategically towards your financial future.

An Investor Awareness Program by Bajaj Finserv Mutual Fund

Visit www.bajajamc.com to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website www.sebi.gov.in/intermediaries.html. For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.sebi.gov.in/ if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.

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