Thinking of booking mutual fund SIP profits? Think again!

Systematic Investment Plans (SIPs) are a tool for disciplined investment. They allow you to save regularly over a certain period and create a corpus for your financial goals. Mutual fund SIPs are affordable and create a disciplined saving habit to achieve your financial goals.

When the market rallies, you might be tempted to redeem your equity mutual fund SIPs to book profits. Who doesn't like quick gains? However, profit booking is not the right strategy, especially with mutual fund SIPs. Let's understand why.

4 Reasons why mutual funds are for the long run 
 

1. SIPs should be for long-term wealth creation
 

Mutual fund SIPs create long-term financial corpus through slow but consistent investments. With SIPs, you usually intend to amass sufficient funds for your long-term goals, such as buying a house, a child's higher education or marriage, retirement planning, etc. As such, redeeming the investment only for a profit curtails your plan. How will you meet your goals if you stop investing?

2. You lose out on the power of compounding
 

Compounding means earning returns on previous investments. Confused? Here's an example to simplify things:

Say you invest Rs 1 lakh and earn 10% in the first year, which is Rs 10,000. In the next year, if the return remains at 10%, you earn Rs 11,000, i.e., 10% on Rs 1 lakh = Rs 10,000.

This is how compounding works: Returns accumulate, and you earn future returns on them too.

Compounding can work if you give it time. The longer you invest, the higher your returns. When you redeem your SIP, you break your investment continuity. The tenure shortens, and you lose out on returns.

Here's a quick example that puts things into perspective:

As you can see, you lose half the corpus by redeeming just 5 years before the intended time!

3. SIPs are not market-timing strategies
 

One of the primary benefits of a mutual fund SIP is the freedom from market timing. Since your investment is automated, you don't have to worry about market highs and lows. You get the benefit of rupee-cost averaging, wherein the Net Asset Value (NAV) per unit is averaged out.

With SIPs, you try to beat market volatility, not book profits and close the scheme when the market rises.

4. There might be a lock-in period
 

If you have chosen an Equity Linked Saving Scheme (ELSS) and invest through SIPs, redemption is impossible during the lock-in period. Each SIP investment has a lock-in period of 3 years, and you cannot book profits during that period. For instance, if your SIP is dated 1 January 2023, you won't be able to redeem it before 1 January 2026.

The lock-in period under ELSS also discourages redemptions and profit bookings.

Conclusion

Booking your profits may seem attractive and tempting, but remember the financial goal behind your mutual fund SIP. Unless your advisor recommends making investment changes, ignore market volatility. If the market rallies, your SIP will grow and yield positive returns even when you don't book profits. Give your investment time and watch it grow into a suitable corpus to meet your financial goals.

Assess your risk appetite and investment horizon and choose a suitable mutual fund SIP to generate wealth. IDFC FIRST Bank offers several types of SIP options. You can choose one or more types of portfolio diversification and grow your wealth, one SIP at a time!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.