Investing in mutual funds through SIPs for 10 years is a beneficial strategy for most investors seeking to maximise their returns. Investing in SIP for 10 years fosters long-term financial growth and mitigates short-term volatility by leveraging the power of compounding and benefits of rupee-cost averaging. Investing in SIP for 10 years can help you inculcate a disciplined investment habit, streamlining the path to your financial goals and ensuring steady wealth creation over time. This article offers a comprehensive guide on why it is good to invest in SIP for 10 years, outlining investor compatibility, factors to consider when choosing the best SIP plans for 10 years, and the risks associated with SIP investments.

When it comes to deciding on the ideal SIP investment duration, there is no one-size-fits-all formula. The ideal duration for each investor varies, depending on subjective factors like their specific goals and investment horizons. Each goal requires a different target amount and comes with a different fulfilment date. That said, ideally, you should invest in mutual funds with a long-term horizon since the longer you remain invested, the more time your corpus has to grow. Moreover, investing via SIPs over longer durations helps you leverage the benefits of rupee cost averaging over time. Due to the power of compounding and rupee-cost averaging, 10-year SIP returns tend to be better than SIP returns from a 2 or 3-year investment. Additionally, you can opt to remain invested even after your SIP stops. In other words, your holding period can be different from your investment period.

A longer investment horizon is always beneficial in the case of SIP investments. If you plan on investing in SIP for 10 years, you can balance out the risk and return on your investment. Continuing your SIP for 10 years helps maximise the power of compounding and rupee-cost averaging to build a significant corpus over time.

Let’s take an example to understand why it is good to invest in SIP for 10 years. Suppose you start investing in an equity SIP with a monthly contribution of Rs. 10,000 for 10 years. The expected return on SIP is 10%. SIP returns in 10 years will stand at Rs. 8,65,520 with your total corpus growing to Rs. 20,65,520. If you had undertaken the same investment with a shorter investment tenure of 5 years, your total return would be only Rs.1,80,824. This shows the power of compounding, where your corpus exponentially grows over a long-term horizon.

It is good to invest in SIP for 10 years if you have long-term financial goals. Goals like building an education fund for your children, retirement planning, and wealth accumulation require longer investment tenures. For most investors, these goals are at least a decade away which gives the invested funds enough time to compound and grow. Additionally, the long-term horizon also helps balance out short-term market volatility ensuring good SIP returns in 10 years.

Investing in SIP for 10 years offers the following benefits:

1. Rupee-cost averaging

When investing in mutual funds SIPs, you contribute a specific sum at regular intervals, regardless of the market conditions. Investing a fixed sum at fixed intervals helps average out the cost of investment over time. In other words, you buy more units when prices are low and fewer units when prices are high, bringing down the average cost per unit. This helps minimise the impact of short-term market volatility on your investment and its returns.

2. Compounding benefits

The power of compounding works hand-in-hand with the investment tenure. The longer your investment horizon, the better the compounding effect on your funds. Under the compounding effect, both your principal and accumulated earnings generate returns, resulting in substantial SIP returns in 10 years.

3. Disciplined approach

SIPs are powerful tools to inculcate investment disciplines. When you invest via SIP, you contribute a fixed sum at regular intervals - weekly, monthly, or quarterly. Sticking to a consistently investment schedule fosters discipline. You can automate contributions with a NACH mandate to streamline the investment process for auto-debits at selected intervals.

4. Long-term wealth creation

It is good to invest in SIP for 10 years to create long-term wealth. While initial returns may seem modest, remaining invested for the long haul ensures better enhancement. Both your reinvested returns and subsequent contributions grow under the power of compounding to ensure substantial SIP returns in 10 years. This snowballing effect amplifies your 10-year SIP returns, creating a sizable wealth corpus.

5. Flexibility

Flexibility and investment ease are chief benefits of investing in SIP for 10 years. You can start SIPs with a manageable amount, determine the investment horizon, and choose mutual fund schemes that best match your investment objectives and risk tolerance. Additionally, you also have the right to pause or modify investments based on changes in your life and financial conditions.

While it is good to invest in SIP for 10 years, the key is selecting the right funds. Selecting a SIP for 10 years requires careful deliberation and assessment of a range of factors. Here’s a list of factors you should consider when shortlisting the best SIP plan for 10 years:

1. Investment objective

Clearly specify your investment objective before you start investing. Whether your investment is geared towards short-term goals like buying a car or a long-term one like retirement will determine which type of fund you pick. For instance, debt SIPs tend to be safer options for short-term goals, while equity SIPs tend to be better for long-term goals. In short, the fund you pick must align with your investment goals.

2. Risk tolerance

Risk tolerance refers to your capability to shoulder investment risks. Your risk tolerance level plays a crucial part in determining fund selection as well as your investment style. For instance, if you are a risk-averse investor, you may prefer a debt fund SIP that primarily invests in government bonds. Alternatively, if you have a high-risk appetite and don’t mind risking your capital for potentially high returns, an equity SIP that primarily invests in medium and small-cap companies may be better.

3. Fund performance

When comparing mutual funds, remember to evaluate the past performance of the schemes carefully. Assessing the past performance of the fund over the last decade or so gives you a fair idea about its return potential. Evaluate the fund’s returns against its peer funds to get a holistic idea. While past performance does not guarantee future returns, it remains an important parameter to consider when choosing SIP investments.

4. Expense ratio

Expense ratio is the annual maintenance fee the MF house charges for the management of the fund. Expense ratios vary depending on the total assets under management but generally range from 0.80%-2.25% of the fund. Additionally, Indian market regulator, SEBI, has set expense ratio ceilings for different types of funds. A lower expense ratio can help you maximise your 10-year SIP returns since a higher one can eat away at your earnings over time.

5. Fund manager's experience

Research the fund manager’s experience carefully before selecting a fund for SIP investments. The fund manager plays a crucial role in managing the fund, allocating resources, and making decisions. Therefore, it is essential to carefully assess the fund manager’s track record to ensure your money is in financially prudent hands.

6. Asset allocation

Review the asset allocation of the fund in question to ensure it aligns with your risk profile and investment objectives. Each fund has a different asset allocation matrix. Equity funds focus at least 65% of their investment in company stocks, while debt funds invest in bonds. Hybrid funds invest in both equity and debt instruments in varying proportions. Additionally, remember that diversification is key when it comes to mutual fund investments. Try to spread your total SIP investments across asset classes and sectors to maximise SIP returns in 10 years and minimise risk exposure.

As an informed investor, you should be aware of both the rewards and risks of long-term SIP investments. While SIP returns in 10 years can help you accumulate a sizable wealth corpus, they also come with the following risks and challenges:

1. Market volatility

Like all market-linked investments, mutual fund SIPs are also subject to periods of volatility. Drastic upward and downward wings in the equity market can significantly impact your portfolio value and returns. While upward swings can boost the NAV of your units, downward swings can devalue your portfolio. However, historically, short-term volatility tends to be balanced out over a long-term horizon resulting in good market performance over the long haul.

2. Interest rate risk

Interest rate risk relates to debt-oriented funds. Prices of debt securities like bonds change inversely with changes in the prevalent interest rate in the economy. In other words, when interest rates rise, prices of bonds fall impacting your total returns.

3. Credit risk

Credit risk is also associated with debt securities like bonds. It is the risk that the bond issuer might default on the interest payment and the principal amount. You can minimise credit risk by investing in debt funds that primarily focus on government bonds and AAA-rated investment-grade bonds. Government bonds have an ultra-low default possibility, while investment-grade bonds that carry a high credit rating also indicate low levels of default risk.

4. Inflation risk

Inflation risk is the risk of your investment losing real value over the 10-year investment horizon. If the rate of inflation outpaces the growth rate of your SIP, you risk losing the purchasing power of your investment. Carefully assessing the average SIP returns in 10 years for the selected funds can help you choose funds that have offered inflation-beating returns and minimise exposure to this risk.

5. Liquidity risk

While it is good to invest in SIP for 10 years, you must also understand that there may be a liquidity risk associated with such an investment. Generally, mutual funds are highly liquid investments where you can sell your units and redeem your investment easily. However, in certain circumstances, immediate selling may not be possible. Redemption may be delayed or restricted, creating a liquidity barrier.

6. Regulatory changes

Changes in the country’s taxation laws and regulatory policies governing MFs can significantly impact your returns. For instance, according to the changes introduced by the 2024 Budget, a 12.5% long-term capital gains tax (with zero indexation benefits) will be applicable on equity-oriented MFs as compared to the previous 10% rate. Similarly, the short-term capital gains tax on equity funds now stands at 20%. This hiked taxation rate risks eroding your 10-year SIP returns.

In a nutshell, if you’re wondering whether it is a good idea to invest in SIP for 10 years, the answer is yes. You should invest in SIPs for 10 or more to leverage the benefits of compounding and build a sizable wealth corpus over time. A long-term investment horizon helps maximise the potential of rupee-cost average and balance-out short-term volatility for better returns. To maximise your 10-year SIP returns, you must select mutual fund schemes that perfectly aligns with your financial goals and risk appetite. Factors like fund performance, expense ratio, and the fund manager’s experience can help narrow your search to curate the perfect diversified SIP portfolio.

If 10-year SIP returns seem tempting, you should start your MF investment journey today to give your funds ample time to grow. The Bajaj Finserv Mutual Fund Platform is the easiest one-stop platform you need on this journey. On this smart platform, you can browse through various MF schemes, compare average returns over time, and select schemes that best match your goals. You can also estimate returns using our Mutual Fund Calculator and start investing via SIPs with as little as Rs. 100!