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SIPs and Long Term Returns
Investing in equity is one of the best way to have a good returns on one's investments over a period of time (i.e. long term). Using the mutual fund route to invest in equities is comparatively less riskier option as compared to directly investing in stock markets. Professional money managers will be taking care of your investment, and you do not need to directly monitor the investments on a day to day basis. While investing in a mutual fund, the Systematic Investment Plan (SIP) route is considered to the best option. By investing in the Systematic Investment Plan one gets benefits from both an up market as well as a down market.
What is a SIP:
One should ideally invest via the SIP (systematic investment plan) route, as this ensures that one does not need to time the market. Since the investment takes place each month irrespective of the market condition, one benefits from both an up market as well as a down market. In times of bull runs, one's portfolio returns will be higher, and in bear markets one will get more units for the same amount of investment - which will later lead to better returns. In an SIP model investors tend to purchase more units when markets falls and fewer units when the market rises. Hence the average cost per unit declines over a period of time, thus being an effective tool of risk management. This benefit can be availed only when the investor tries to stick on for a long term basis as market is highly volatile and it is difficult to time the market. Hence, it is advisable to always invest in mutual funds via the SIP route and automate this investment to ensure that it is made correctly each month.
Equity investment:
Even though the risk factors associated with equity investments are high, there are ways in which you can reduce the risk of gaining low return from your investment, investing in equity via Systematic Investment plan (SIP) route is and one of the best to get good returns at a managed level of Risk. However, investing in long run SIP can get you a stable return without incurring losses over the long term, the reason behind this is the risk associated in the long term equity investments are much lower, especially when one averages the cost over a period of time.
What is your risk appetite?
Whether you want to invest via SIP or directly into equity depends upon your level of risk tolerance. If you are risk averse then investing via SIP in mutual fund/equities is advisable, if you have large risk appetite and are able to analyze the markets on your own, then you can invest directly in equities. The returns gained from long term SIP and long term equity investment gives a different picture, a 10 year SIP return can be in the range of 12%-15%, whereas the long term return from equity investment lies on how good one is in analyzing the market condition.
Summary:
• Systematic Investment Planning (SIP) - a less riskier platform as compared to direct equity investment to drop in your investment to gain a good return.
• Investing via SIP reduces risk associated with the investment returns.
• Long term investment via SIP will reap a stable return at lower risk – i.e one will have the benefit of Higher Risk Adjusted Returns.
• Always investing in Mutual fund via SIP is advisable for better returns in long term.
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