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Over the years, the Systematic Investment Monthly Plan (SIP), a facility offered by mutual funds, has become a household name. Its popularity among investors can be seen from the fact that the growth in monthly SIP contributions from investors over the last six years has grown from about Rs 3,700 crore to nearly Rs 13,000 crore. With growing interest in SIPs, a few obvious questions come to the investor’s mind. A study conducted by WhiteOak Capital Mutual Fund attempts to address some of these commonly asked questions around SIP investment backed by long-period market indices data. The answers will surprise you.
Is there a best date for monthly SIP?
Start of the month? End of the month? Middle of the month? Near the last Thursday of the month because of higher volatility due to F&O expiry? Splitting the SIP amount into multiple date SIPs? Many investors have weighed these options when they think about the best date to do monthly MF SIP. Look at the chart below.
Long-period data from the S&P BSE Sensex TRI shows that in the last 26 years, there has been no meaningful difference between the average return of different dates’ 10-years SIPs. The best SIP date is when you can do the SIP!
Is the frequency of SIPs important?
SIPs from mutual funds today are available across a host of frequencies. Apart from the monthly frequency, mutual funds or asset management companies allow you to do daily and weekly SIP also. So, some new and old investors do spend a lot of time thinking about the best frequency to go for. However, historical data analysis suggests that, in the long term, it hardly matters if the investor invests at a Daily, Weekly, or Monthly SIP Frequency (see table below).
All three frequencies end up generating somewhat similar returns (in per cent XIRR). The key takeaway from the analysis is to focus on investing a small amount regularly for the long term. It can be any frequency, but you have to keep on investing to leverage the benefits of SIP investing.
Timing monthly purchases
While SIP in mutual funds use the rupee-cost averaging practice, which is built to avoid timing the markets, many investors and organisations are loud advocates of timing SIPs. Unfortunately, only in hindsight would we know what would have been the best day to invest during a month.
It is impossible to consistently time the market levels. What happens, meanwhile, is that you are waiting for the right time to invest and that can lead to missed opportunities. In fact, not investing at all is a more significant loss than entering an unfavourable market. In the chart below, we look at what would have happened if you could by some divine or other intervention time your monthly SIPs.
As data shows, even the worst market timing will help grow wealth! In fact, the time between investing on the best and worst days is insignificant. The hassle-free approach would be to invest on a fixed date that you find convenient and see your wealth grow over the long-term.
Ideal investment horizon for SIPs
Experts often recommend investment for the “long-term,” but what exactly is “long-term”? What is the “Ideal Investment Horizon”? Or is there anything called an “Ideal Investment Horizon”? Equities have proved to be a volatile asset class in the past. But the study reveals volatility reduces as investors increase their investment horizon.
To conclude, longer the investment horizon, higher is the probability of receiving decent SIP returns.
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