A Systematic Investment Plan (SIP) has emerged as a popular tool for investing in mutual fund (MF) schemes. Starting an SIP is committing to invest a fixed sum periodically –can be daily, monthly, quarterly and yearly in a fund. The monthly option is the most popular.
Some of the benefits of the SIP over a lump sum investment is that it inculcates a more disciplined approach. Investing regularly over a long period of time can also help unleash the power of compounding. Also, SIPs help iron out market volatility because they take ‘timing the market’ out of the equation. Instead, SIPs help investors realise the long term return potential for any asset class.
The ticket-size of an SIP can be small—ideally a portion of your monthly salary or income that you can set aside for regular investing. But what is the best frequency for an SIP? Will a monthly commitment yield better returns or would investing the same amount daily be a more efficient way? Let’s find out:
In search of better gains
For any investment decision, the key deciding factor is performance. Stock markets can fluctuate on a daily basis. So a daily investment in theory can help in better cost averaging. However, investing in an MF equity scheme is buying a basket of securities. As a result, the volatility of an individual stock tends to have little bearing on the performance of the scheme. Backing testing of data has shown there is no meaningful difference in long-term returns between daily, weekly and monthly intervals. The actual returns differ only marginally over a 10-,15- and 20-year period.
When it comes to a monthly SIP, the investment date can also impact your actual returns. For instance, if your investment date is the 3rd of every month but the market surges 10 per cent on the 2nd following some big event, you would potentially miss out on that gain. Theoretically, a daily SIP would enable you to gain from that movement.
However, in reality, such sharp movements are rare. Also, your daily or monthly commitment is only a smaller portion of the overall investment you will make, over, say a five or ten year period. In the long-term, the return profile doesn’t alter much on the basis of date or frequency.
Operational aspects
Knowing that the choice between daily, weekly and monthly SIPs won’t impact returns in the long term, one then should decide based on other factors. These include your financial profile, ease of investing and reconciling of account statements.
If your SIP outgo is tied to your salary, it is better to opt for a monthly SIP. The date of investment can be a day or two after the date your salary is credited. If you have sufficient cash balance in your bank account and the SIP payment is agnostic to your salary, a daily SIP could be an option. In case in your line of work, you get a daily income, you may want to immediately save a portion of it. In such a case, you should opt for daily SIPs.
Earlier, daily SIPs were considered a cumbersome affair. However, digital investment platforms have made it easy to invest at any frequency. But if you think daily investment would still be a big headache, it is better to do it monthly in a more planned approach.
Finally, the accounting part. MF investments be it via SIP or lumpsum are subject to capital gains tax— both short and long-term. The tax rates differ for equity, debt and hybrid funds. Having a daily SIP can add a layer of complexity at the time of tax filing. Ensure your AMC or investment platform will give you proper account statements to help with the tax filings.
Conclusion
Choosing between daily, weekly and monthly SIPs will not have a significant impact on your returns especially if you are investing for the long-term. However, other considerations such as financial profile and ease of investing should be considered before one decides to opt for the less-popular daily SIP.
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