Don’t you hate it when you peel a boiled egg and find it runny? The only thing that comes in the way of your perfect breakfast is the duration on the gas. Take the eggs out before time and you have yourself a bit of a disaster. Something similar can be said for your Systematic Investment Plan (SIP) and its duration in the market. Take out your funds too quickly and you may lose potential returns, the opportunity for your money to compound, and possible tax savings with a lower tax rate. So, do you consider a long term SIP mutual fund or a short term one? Let’s decode this math!
It’s simple! Your goals can help you decide your investment tenure
Your goals are the primary factor to focus on when selecting a short term or a long term SIP mutual fund.
The ‘long’ and ‘short’ terms can seem perplexing as they can mean different things to different investors. Typically, a long term SIP mutual fund could stay with you for at least five years or more. In the case of a long-term equity fund, whether a small, mid, or large-cap fund, investing for five to seven years on a minimum can help you tide over market volatility. A long-term equity fund can be ideal for future goals like retirement, a child’s higher education expenses, and other similar needs.
On the other hand, you can consider debt funds for investment in the short term as these invest in fixed income securities and are not linked to the stock market as much as they are to interest rates. So, they can be used to park your money for immediate or near-term needs like building an emergency fund or buying a phone.
Choosing the right type of mutual fund is as important as deciding on tenure.
- How long should you stay invested?
The simple answer is as long as you don’t need the money for your goals. When you stay invested for a long time, you let your money grow through the power of compounding. So, let’s say, if you have been investing in a large-cap fund for 15 years to buy a house, it makes sense to redeem your investment only at the end of the 15th year and use the money to cover the expenses of your home.
Taxes can also impact your investment tenure
Tax is another critical thing to keep in mind when selecting the term of your mutual funds for investment. Mutual funds are taxed differently. Long term capital gains (LTCG) on equity funds are taxed at 10% for funds held for more than a year. This is only charged on gains exceeding Rs. 1 lakh/year. LTCG on debt funds is taxed at 20% with indexation benefits for funds held for longer than 36 months. Short term capital gains (STCG) on equity funds are taxed at 15%, while STCG on debt funds are taxed as per your income tax slab.
Additionally, tax saving options like Equity-Linked Savings Schemes (ELSS) have a three-year lock-in period. So, you will have to hold your investment for at least three years.
Unless you are investing for a specific short-term goal, it is better to opt for long-term investments.
Benefits of long term investing
The brilliance of a long term SIP mutual fund is that it lets you build wealth slowly without burdening you with its costs. So, you can continue investing Rs. 500 or Rs. 50,000, whatever suits you, for the long term and build considerable wealth depending on the type of fund and its returns.
Long-term investing lets you benefit from the power of compounding that reinvests your profits to earn more. Long-term investing through SIPs also averages the cost of your investment. Rupee cost averaging helps you buy more units when the market is low and vice versa at the same SIP amount. Moreover, long-term investments may turn out to be more tax efficient.
Conclusion
Understanding your goals can be one of the keys to picking the length of your SIP. The tax treatment is another critical feature. So, factor these in, and you can choose a mutual fund investment. That said, a long-term investment perspective can bring several benefits.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
