What is the ideal investment time horizon for mutual fund SIP?

  • In a report, WhiteOak Capital Mutual Fund stated that equities have proved to be a volatile asset class in the past. But, the study reveals volatility reduces as investors increase their investment horizon.

Pooja Sitaram Jaiswar
Updated30 Oct 2022
The first and foremost point to remember is that the longer the tenure of investment in SIPs, the better the returns.
The first and foremost point to remember is that the longer the tenure of investment in SIPs, the better the returns.

Almost every investor is familiar with the term 'invest in SIPs for the longer term'. It's a piece of common advice when it comes to beginning a SIP for investing in mutual fund schemes. But how to understand which is an ideal time horizon for investment through SIPs for the long term? One of the best advantages in Systematic Investment Plans (SIPs) are the power of compounding if invested in the long run. In simple words, compounding indicates that the interest you earn on your SIPs is reinvested along with the original investment amount and that the overall corpus continues to earn returns and multiply to grow further.

But what is the 'long-term' when it comes to SIPs? How many years an investor needs to stay invested in SIPs to earn decent and if possible stellar returns on their corpus? What is the ideal investment time horizon for SIPs? Is 3 years an ideal investment horizon, or is it 5 years, or is 15 years a better option, or in between years? The questions continue to go on.

The first and foremost point to remember is that the longer the tenure of investment in SIPs, the better the returns.

In a report, WhiteOak Capital Mutual Fund stated that equities have proved to be a volatile asset class in the past. But, the study reveals volatility reduces as investors increase their investment horizon.

An illustration!

Giving an illustration, WhiteOak data shows that the average return in a 3-year SIP period is around 12.9%, while the median return is around 11.9%. For a 5-year SIP period, the average return is approximately around 15.2%, and the median return is around 13%. If the SIP period is for 8 years, the average and median return comes to around 16.3% and 14.1%.

But in the case of a 10-year SIP period, the average and median return is around 15.8% and 14.2%. For a 12-years period, the average and median return is around 14.7% and 13.9% respectively. In the case of a 15-years SIP period, the average return comes to around 14.4% and the median return is around 14.9%.

These returns are the percentage of XIRR Rolling Returns on monthly basis for S&P BSE Sensex TRI for SIP between September 1996 to September 2022. Notably, past performance may or may not be sustained in the future.

In its remark, WhiteOak note stated that "longer the investment horizon, higher is the probability of receiving decent returns!."

Another illustration:

Taking into consideration the percentage XIRR Rolling Returns on monthly basis for S&P BSE Sensex TRI for SIP between September 1996

to September 2022, WhiteOak data revealed that the chances of earning positive returns are 100% for 8-years, 10-years, 12-years, and 15 years SIP period. While the chances for a positive return are around 83% for 3-years and 91% for a 5-years SIP period.

Also, the percentage times more than 10% return is higher in 8 years (80%), 10 years (94%), 12 years (98%), and 15 years (97%). The same is the case for the percentage times more than 12% return through SIPs.

One of the best advantages in SIPs are the power of compounding if invested in the long run.

According to AMFI, SIP has been gaining popularity among Indian MF investors, as it helps in Rupee Cost Averaging and also in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by mutual funds are easily the best way to enter the world of investments over the long term.

Further, the AMFI website stated that there is a great advantage with long-term investments, namely, compounding which is considered one of the greatest mathematical discoveries.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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