Best SIP Investment Plan For 3 Years

This blog is a guide to understanding SIPs, selecting the best possible mutual funds for a 3-year period horizon. In addition to this, it explains why SIPs often outperforms lump sum investments.

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Introduction: What Is a SIP?

A Systematic Investment Plan (SIP) enables investors to purchase mutual funds through scheduled periodic payments which can be made monthly or quarterly. Through SIP you invest a set amount regularly which helps you buy more units during low market periods and fewer units during high market periods through rupee cost averaging. The practice of SIP investing enables you to benefit from compound growth in your investments.

Why SIP provides better investment results than lump-sum investing:

• SIP investments through time protect your money from market peaks because they distribute your investments across various time periods.
• Discipline and Habit Formation: SIPs help investors develop investing discipline because they operate through a pre-set payment schedule.
• The system enables users to adjust their SIP investments according to their present financial condition.
• Your investment will experience exponential growth through regular return reinvestment which SIPs provide.
• SIPs eliminate most of the market timing challenges which lump-sum investing requires because they operate independently of market conditions.

How to Choose Mutual Fund for a 3-year SIP

Here are the key factors to consider when choosing mutual funds for 3-year SIP:

Risk Profile and Time Horizon: The three-year investment duration matches the defined medium-term duration. Equity funds provide investors with the chance to earn high returns but their investment results stay uncertain while hybrid and balanced funds provide investors with more stable investment choices.

Fund Category: Investors need to select between large-cap funds and mid-cap funds and small-cap funds and flexi-cap funds and hybrid funds.

Funds Consistency: Investors should evaluate fund performance through three-year return analysis and by examining past value changes of the fund.

Expenses Ratio and AUM Size: The fund receives support from multiple investors because it has a low expense ratio and high AUM.

Fund Manager’s Philosophy: The investment approach of the fund manager becomes clear when investors understand his stock selection methods between growth investing and value investing and hybrid strategies.

Diversification: Investors need to spread their SIP investments across multiple funds because putting all money into one fund is not recommended. Investors should distribute their SIP investments between different investment styles and asset classes to achieve risk management.

Five Mutual Funds to Consider for a 3-Year SIP Horizon

The following five mutual funds present suitable options for 3-year SIP investments based on their historical performance and risk vs reward characteristics and their suitability for short to medium-term investments. (Note: Mutual fund investments carry risk; past performance does not guarantee future returns.)

Parag Parikh Flexi Cap Fund – Direct Plan (Growth)

Parag Parikh Flexi Cap Fund operates as a flexi-cap strategy which distributes investments between large-cap and mid-cap and small-cap stocks and overseas equity assets.

This mutual fund's investment universe is not restricted by any self-imposed limitations in terms of sector, market capitalisation, geography, etc. The fund provides investors with suitable investment options because of its global diversified approach, which helps reduce risks that come from Indian market volatility.

HDFC Flexi Cap Fund – Direct Plan (Growth)

HDFC Flexi Cap Fund operates as a flexi-cap value-biased investment strategy.

HDFC Flexi Cap Fund is an open ended dynamic equity scheme investing across large cap, mid cap, small cap stocks. The Fund follows a long term oriented, disciplined and consistent approach to investments.

Nippon India Balanced Advantage Fund – Direct Plan (Growth)

Nippon India Balanced Advantage Fund operates as a balanced advantage / dynamic asset allocation strategy which moves between equity and debt investments based on market valuation assessments. This hybrid fund dynamically balances equity and fixed-income allocations, adapting to changing market conditions. Its dynamic asset allocation model tends to remove emotional biases from investing and seeks to capture the growth potential of equity and the potential stability of debt, aiming for better risk-adjusted returns.

ICICI Prudential Equity & Debt Fund – Direct Plan (Growth)

ICICI Prudential Equity & Debt Fund operates as an aggressive hybrid fund which distributes its investments between equity securities and debt instruments. Scheme’s equity exposure ranges between 65%-80% and debt exposure between 20%-35%.

HDFC Hybrid Equity Fund – Direct Plan (Growth)

HDFC Hybrid Equity Fund operates as an hybrid fund which invests most of its assets in equities but maintains debt holdings to minimise market volatility. 65-80% of the portfolio will be invested in equity/equity related instruments.

The aim of equity strategy will be to build a portfolio of companies across market capitalisation which have: reasonable growth prospects, sound financial strength, sustainable business models, acceptable valuations that offer potential for capital appreciation. The Scheme aims to maintain a reasonably diversified portfolio at all times.

Risks & Considerations for a 3-Year SIP

Market Volatility: The value of equity and small-cap funds will experience major fluctuations during a three-year period which could result in temporary investment losses.

Interest Rate-Risk (Hybrid Fund): The value of debt investments in hybrid funds will respond to changes in interest rates.

Liquidity Requirement: The liquidity requirements of your investment portfolio should determine whether to choose equity funds because they become less suitable for short-term access to funds.

Tax Implications: The sale of investments within a short-term period i.e. less than 12 months will produce short-term capital gains. Sale of investment shall be liable for long-term capital gains with an exemption limit of ₹1.25 lakh per financial year for equity oriented mutual funds.

Change in Approach and Strategy: The investment strategy and management approach and asset distribution of your fund might transform during the period so you should perform regular assessments.

Why SIP Makes Sense for a 3-Year Horizon

• The SIP investment method helps you average down your purchase price by periodically buying.
• It helps you to start small and build disciplined saving habits.
• Time in the markets beats timing the market and it helps you to avoid the market timing.

Conclusion

SIPs allow investors to purchase mutual funds through regular investments which help them reach their three-year targets without requiring market prediction abilities. A flexi-cap fund (Parag Parikh Flexi Cap) combined with a hybrid fund (ICICI Prudential Equity & Debt) and a small-cap fund (Nippon India Small Cap) will help you achieve growth while controlling your investment risks.

The selection of investment funds requires you to assess their performance records and investment strategies and their potential to expand your investment portfolio. SIPs provide investors with a systematic approach to investing which helps them manage market volatility and generate compound returns for their medium-term financial targets.