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SIP for 5 Years – How Can It Grow Your Wealth?

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Short for Systematic Investment Plan, SIP is a method to invest your money in a mutual fund scheme via regular and periodic contributions. What’s interesting about SIPs is that you can make small investments every month and make excellent gains in wealth over time.

With the help of SIPs, you can achieve your financial goal in the long run. However, if required, you can also invest in mutual funds via SIP for the short term. If you are looking to accomplish immediate financial goals such as purchasing a new car or house or arranging funds for marriage, you can certainly turn towards any of the best SIP plans for 5 years.

If you want to understand how these SIPs work, their benefits, how to get the best SIP for 5 years, things to consider before getting this plan, and more, let’s go through the article below.

What Do You Mean by SIP for 5 Years?

An SIP plan for 5 years is a goal-oriented plan that directs a portion of your money towards a set mutual fund scheme. The investments are made in large-cap equity funds so that you can receive long-term capital appreciation. You can channelise at least 80% of your SIP investments towards these assets. Some of the best SIP for 5 years also make investments in index funds.

When you invest in the best SIP plans for 5 years, you lock in your funds for the set duration. With the help of compounding, the investments multiply to provide you with considerably high returns over time.

Things to Keep in Mind before Investing through SIP Plans for 5 Years

Take these aspects into consideration before investing in SIP plans for 5 years -

  1. Identify Your Financial Objectives - Get clarity about why you want to invest in mutual funds through the best SIPs for 5 years. The goal could be creating a retirement corpus, purchasing a new car or house, arranging funds for marriage, and more. Once you have realised the financial goal that you want to achieve, you can easily determine the contribution amount, the policy tenure, and the type of scheme to invest in.
  2. Look for the Best Performing Mutual Fund Scheme - Prior to starting a SIP for 5 years, it is crucial to check the mutual fund scheme’s performance over 5 years. You can compare the funds based on the set benchmarks, peer funds, and the fund category.
  3. Evaluate Your Risk Profile - Different mutual funds have different risk profiles and can be divided into low, medium, and high-risk investment instruments. The degree of risk depends on the type of securities and assets you are investing in. Before making any SIP investment for 5 years, evaluate your risk tolerance with respect to factors like your age, investment horizon, present financial commitments, and income. You can balance your risk by uniformly distributing your investments in multiple mutual funds of different risk profiles through SIP.
  4. Analyse the Fund House’s Market Performance - Before starting to invest in mutual funds using an SIP plan for 5 years, you should evaluate the fund house’s market functioning as well. Examine the fund house for its credentials like the fund manager’s experience and the types of assets the fund house invests in. You can go for a fund house that has shown a consistent and strong performance over the years.
  5. Expense Ratio - Before selecting the best SIP for 5 years for yourself, it is crucial to check the fund’s expense ratio and the entry and exit loads charged upon redemption. You should also go through the fund fact documents, performance tracking reports, and portfolio statements to get clarity about the SIP investment amount.

Types of SIPs You Can Use to Invest in Mutual Funds for 5 Years

Discussed below are the types of SIPs that you can choose from to invest in mutual fund schemes to earn high SIP returns in 5 years –

  • Flexible SIP - Popularly known as Flexi SIP, a flexible SIP enables you to adjust the contribution amount as per the market’s performance. Naturally, you have a high degree of control over the SIP with a Flexi SIP. You can increase the contribution if the market is performing well and reduce the amount if the market is falling. If you want to invest in a SIP for 5 years and make contributions as per your current financial situation, this type of SIP is suitable for you.
  • Top-up SIP - Also known as Step-up SIP, a top-up SIP lets you increase the contribution at pre-decided intervals. You can start by investing, say, AED 5,000 monthly in a mutual fund scheme and request the fund house to increase the contribution by AED 1,000 half-yearly till the time horizon of your scheme ends.This way, you will start by investing AED 5,000 for the first 6 months, followed by investing AED 6,000 for the next six months, and so on. As you may expect, this type of SIP is suitable if you are a salaried individual who gets annual or half-yearly appraisals. This systematic investment plan enables you to automatically increase your contribution corresponding to the salary increases.
  • Trigger SIP - This type of investment enables you to contribute to the mutual funds only if a designated event or a favourable market scenario occurs. It is important to note that trigger SIPs require you to have excellent market knowledge. It is, therefore, a suitable investment method only if you are a seasoned investor.

Types of Mutual Funds You Can Invest in for 5 Years

When you plan to make SIP investments for 5 years, it is necessary to understand the type of mutual funds that you can invest in. These types can be classified according to various characteristics.

The following are the types of funds where you can use SIP to get high SIP returns in 5 years -

1. Based on Asset Class

Here are the types of mutual funds as per the asset class –

Equity Funds - It is one of the best SIP for 5-year investment options. Under equity funds, the contribution is invested in stocks. The funds are pooled from various investors from diverse backgrounds and are invested in shares or stocks of top-performing companies. Equity funds can provide you with high SIP returns in the next 5 years.

The following are the types of equity funds you can invest in –

Large-Cap Equity Funds - You can make investments in large-cap equity funds to get the expected returns in a short span. Your SIP contributions will be invested in well-established companies that have commendable market performance and are known to offer stable returns over time.

Mid-Cap Equity Funds - The mid-cap equity funds invest at least 65% of the funds in companies that have relatively moderate market capitalisation. Although more volatile than large-cap funds, they can generate better SIP returns in the next 5 years than the latter.

Small-Cap Equity Funds - Here, the funds are invested into the equity shares of small-cap companies. These equity funds, while potentially having excellent SIP returns in 5 years, are significantly more volatile than large-cap and mid-cap equity funds.

Debt Funds - To get good SIP returns in 5 years, you can contribute to medium-term debt funds as well. A debt fund disburses money in a number of securities as per their credit ratings.

Since you plan to make the best SIP investment for the next 5 years, you can invest in funds like dynamic bonds funds. In comparison with a 5-year bank FD, these debt bond funds provide higher SIP returns in 5 years.

You can consider the following types of debt funds –

Dynamic Bond Funds - In these types of debt funds, the fund manager modifies the portfolio composition based on the altering interest rate pattern. You can make long-term, medium-term, or short-term investments in these types of funds.

Income Funds - Like dynamic bond funds, income funds also operate according to interest rates. However, they are more stable than dynamic bond funds. The maturity period of these debt funds is around 5-6 years.

2. Based on Structure

The structural classification of mutual funds is broad, and the varying factor is the flexibility to purchase and sell individual fund units. The following are the mutual funds you can invest in for maximum SIP returns in 5 years –

Open-ended Funds - When you invest in open-ended funds, there is no constraint on the number of transactions you make in the funds unit. These funds allow you to trade funds at your convenience and exit when required at the prevailing Net Asset Value level. This is why the unit capital changes continuously with every new entry and exit.

3. Special Funds

Index Funds - Suitable for passive SIP investors, index funds are usually managed by individuals themselves and do not require any professional management. The money is invested in market indexes. The funds recognise stocks and their associated corresponding ratio in the market index. These funds cannot outperform the market but imitate the index performance, which has generated good returns over time.

Benefits of Investing in Mutual Funds via SIP for 5 Years

Given below are the major benefits of investing in the best SIP plans for 5 years –

  • Wealth Creation - Several mutual funds like debt funds, index funds, and equity funds allow you to generate wealth. You can choose the type of fund you want to invest in based on your risk appetite and expected good SIP returns in 5 years to create wealth.
  • Flexibility - With SIP investment for 5 years, you have the flexibility to invest in as many financial assets as you find suitable and get reasonable SIP returns in 5 years.
  • Liquidity - SIP investments give you an ideal balance of investment growth and liquidity, with the money that you invest being available to you upon maturity.
  • Spread of Risk - You can spread the risk and invest small amounts across several types of mutual funds.

In a Nutshell

Some of the reasons why investors can opt for the best SIP for 5 years are purchasing a new car or house, arranging funds for marriage, and more. These systematic investments are goal-oriented and often require the investors to invest in mutual funds like equity funds, debt funds, index funds, and open-ended funds.

There are three major ways you can invest in mutual funds via SIP to get maximum SIP returns in 5 years, with these SIP types being flexible SIP, top-up SIP, and trigger SIP. When you invest in mutual funds using the best SIP for 5 years, you create a balance of both wealth generation and liquidity.

To know more about SIP for 5 years, go through the FAQ section below:

FAQ's

Q1. Can you invest in a flexi-cap mutual fund using the best SIP for 5 years?

Ans: You can invest in flexi-cap mutual funds using the best SIP for 5 years. These are equity mutual funds that invest in stocks irrespective of market capitalisation and the sector the funds are in. These funds can help you diversify your portfolio and reduce the risks.

Q2. Who can invest via SIPs for 5 years?

Ans: SIP investments for 5 years are suitable for people who have a high-risk appetite and want to generate wealth in a short period. The reason for investment could be purchasing a car or starting a new business soon.

Q3. Why should you invest in mutual funds for 5 years using the SIP method?

Ans: Listed below are the reasons to invest in mutual funds using SIP –

  1. It helps you develop financial discipline
  2. You can get higher SIP returns in 5 years with the power of compounding
  3. You are not directly affected by market volatility
  4. You can start investing with a smaller amount
Q4. What is the difference between SIP and mutual funds?

Ans: SIP is a technique to invest in mutual funds and not a mutual fund or the market instrument itself. It is an investment method where you regularly invest your funds in a mutual fund scheme.

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