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Systematic Investment Plan, popularly known as SIP is one of the most sought-after routes for investors to invest in mutual funds. And, why shouldn’t it be, SIP investments offer several advantages Several investors invest in mutual funds through the SIP mode of investment due to the several benefits to its investors. The disciplined and regular mode of investing, low minimum investment amount at just Rs 100 per month, power of compounding, rupee cost averaging, no need to time the markets, no upper limit, an antidote to market volatility, etc. are just some of the benefits of SIP investment. Did you know that the longer you stay invested in SIP, the more benefits you are bound to receive it? Do you know the reason behind it? In this article, we will explore why investing in SIP needs to be a long-term affair. But first, let’s quickly recall what a SIP is.
What is SIP?
SIP is an investment tool that permits individuals to invest in the markets in a systematic and disciplined way. Under this mode of investment, an investor has to pre-decide certain parameters of their SIP investment such as investment amount, periodicity of investment, duration of the investment, date of investment, type of SIP, etc. before they begin to invest in SIP mutual funds. On a date set by the investor, a predetermined amount is regularly deducted from the investor’s bank account and further used to purchase mutual fund units for a given duration.
Average holding period
Did you know that even if you invest in mutual funds through SIP investment for a duration of twenty years, then your average holding period of each SIP investment is just ten years? Let’s understand why. Think about it. By the end of the tenure, your first SIP investment would have definitely finished a period of twenty years, but the last SIP investment would or would not have even finished a period of one month. This reduces your holding period to an average of just 10 years. Hence, to have a higher average investment period, it is advised to invest for a longer duration.
Power of compounding
Investing for the long-term means enjoying greater benefits of a concept known as the power of compounding. Compounding allows investors to earn significant returns on their investments as their returns from the investments are reinvested to earn more returns. Basically, your money works hard on its own to make more money for you. The holding period of an investment is directly related to the earnings through compounding. This is because compounding increases returns for an investor at an exponential rate. Hence, to enjoy higher returns through the power of compounding, it is advised to stay invested for a longer duration and begin to invest in the markets from an early age.
Patience and perseverance are two elements that can help you create significant wealth for your investment portfolio. So, be patient and invest in the markets for the long term to achieve significant returns on your investments. Happy investing!
