It is a more common and genuine question amongst investors that is creating confusion while investing into Systematic Investment Plan (SIP). What if you have to invest in a lump sum, then over what period should you spread the SIP?
Undoubtedly, the question does not arise for most SIP investments because the most common type of SIP investments is monthly one that depends on the salaried person on monthly basis. This is the right method to keep investing in SIP without bothering.
Occasionally, SIP investors get a large number of in a one go due to sale of asset like real estate, or it can be a retirement bonus for which you want to invest till your last breath. Investing in an equity-backed mutual fund is the best way to get great returns over a long period of 5-7 years or more.
On the other side, if you are planning to invest more amount for short term in equity funds, you are taking a bigger risk. If the market turns turtle, you may be losing 10, 20 or even higher percentage of your invested money in a single shot.
Since the history of Sensex is not fair enough by calculating its worse performance of more than 20% of loss from April 1979. And if the same period repeats, you would lose a large chunk of your capital right before it started growing. Theory and practical are very different when real scenario come closer to your eyes.
The best solution and antidote to SIP is divided your investment in at monthly mode over a certain period. Your entry price will be averaged out and risk level can be managed on sudden decline.
In addition, you can also buy more units of fund when market is lower, which will nurture your return in a good way. This is the algorithm that can be followed by SIP.
Next question is, what is the ‘certain period’? One year, two years or even longer.
Some of the studies of economists has stated that if you invest in a SIP over four years, your risk of loss is almost negligible. Yes, you heard that right! It’s also interesting that at the certain time period, a risk of loss and chance of good return are both higher over short periods.
Now, let us compare the best study on SIP Investment of Long-Term over Short Term. When it comes to decades of investment, the maximum returns are 160% while the minimum is -57%. For 2 years, it is 82% and -34%. For 3 years, it is 63% & -18%. When it came to 5 years, it is 54% and 4% that means no loss at all.
And, when you invest for 10 years, you will get maximum return of 30% and a minimum of 13%.
An algorithm is crystal clear, the shorter the period, the higher the potential gain but worse the possible risk.
At last, in simple language, if you are going for SIP investment, your minimum period should be more than 3 years and withdraw it in 4-5 years to wear minimum loss and maximum safe return.
(Information described in this article is strictly individual views and perception. There are many inputs from different sources and experts. Views expressed in this articles are his own and do not represent those of News On Screen. Investors are advised to consult their financial planners before taking any investment call based on these views.)