Why SIPs in equity mutual funds are ideal to achieving long-term financial goals

In the fast-paced world of today, achieving one’s long-term financial needs has emerged as a key concern for most investors. We all aspire to achieve more and strive for the finest education, quality of life, and lifestyle for ourselves and our children. Hence, our financial needs need to mirror these aspirations.

In the past, people could build wealth and maintain a decent lifestyle with traditional investment avenues that offered high guaranteed interest rates. However, this is no longer possible with the economy maturing and falling interest rates on fixed-income products. The 25-year average one-year rolling inflation stands at 5.55 per cent, and similar returns from fixed deposits over the same period stand at 7.19 per cent (RBI, 2023), resulting in pre-tax real returns of just 1.64 per cent. Such returns would have barely beaten inflation and built sizable wealth, considering the tax impact.

Equity as an asset class is a viable option for investment. Over the period between April 1982 to March 2023, the 10-year average rolling returns delivered by BSE Sensex was 14.93 per cent, with the chance of making a negative return being 1 in 32 observations. Historically, many studies have shown that equity as an asset class tends to out-perform every other asset class and becomes less risky and volatile as the holding period increases. In fact, it can be considered the primary ingredient today for any wealth creation journey. It is crucial to invest in equities to build wealth and achieve long-term financial goals.

Equity mutual funds are the answer to investing in equities and have delivered average returns of 15.57% over 25 years ending March 2023. Equity mutual funds offer professional management, diversification, convenience, and other benefits at minimal cost in the form of expenses. They are ideally suited to retail investors and those who do not have the time, appetite, or knowledge for research and direct equity investing.

When it comes to investing for any defined financial need, two ways can help: lumpsum or periodic and regular investments. A lump sum investment is pretty straightforward, but the other option of committing a defined cash flow in the future, like a monthly investment, towards a need is more convenient. This is where SIPs come into play.

SIP stands for systematic investment plan, wherein an investment amount is subscribed in a mutual fund scheme at regular periods, often monthly. SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without any hassles. With the monthly contribution reaching Rs13,728 crores for the April 2023 month (AMFI), SIP investments have gained great popularity in recent years. SIPs enable investors to complete the entire loop for investing towards long-term financial needs.

SIPs in equity mutual funds offer several benefits that make them the ideal path towards achieving long-term financial needs. Rupee cost averaging is a simple and effective way to invest, especially for long-term investors who want to reduce the impact of market volatility on their investments. With SIP, when you invest a fixed amount at regular intervals, you are indirectly timing the markets. This is so because you are buying more units when the price, NAV for mutual funds, is low and buying fewer units when the NAV is high. This gradually averages out the overall cost of investment, reducing the impact of market volatility on the value of the investment.

SIPs carry all the inherent benefits of mutual funds, including convenience, liquidity, diversification, professional fund management, and transparency, which investors can look forward to enjoying. Investing in equity funds also carries clear tax benefits.

In conclusion, SIPs in equity mutual funds offer an excellent path towards achieving long-term financial needs. They provide a disciplined and convenient approach to investing and help reduce the impact of market volatility on investments. With the added benefit of rupee cost averaging, SIPs enable investors to invest in mutual funds with ease and build wealth over time. Additionally, the top-up SIP facility offers flexibility to increase investments, maximising returns. As with any investment, investors must do their research and choose the mutual fund scheme that suits their risk profile and long-term financial needs best.

The author is CEO, NJ Wealth. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views.

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