Personal Finance

Daily SIPs are not special

Anand Kalyanaraman | Updated on February 18, 2018 Published on February 18, 2018

Stick to simpler, monthly SIPs

Investing in mutual funds through the systematic investment plan (SIP) route has some key advantages — regular investment in small doses, and averaging the cost of purchase. With fixed sums deployed regularly through SIPs, investors get more units when the fund’s net asset value (NAV) falls and lesser units when it rises — this averages the overall acquisition cost and helps investors benefit from market volatility.

Most fund houses offer monthly SIPs — that is, an investor invests an amount every month on a chosen day. But a few fund houses also offer more frequent SIPs — daily or weekly. So, say, instead of putting ₹5,000 in a fund scheme on the fifth of each month, an investor could choose to deploy ₹250 daily through all the business days of the month in a daily SIP.

Daily SIPs are said to offer further advantage to investors in beating market volatility, better cost averaging and higher returns, compared with monthly SIPs. For instance, what if the market tanks the day after the monthly SIP is processed? In a daily SIP, the investor could reduce this risk of being caught on the wrong foot, as the investment is spread across the month.

Not quite different

But do daily SIPs really pack a special punch? Not quite, show our number checks for a few equity funds — HDFC Equity Fund, ICICI Prudential Value Discovery, LIC MF Growth Fund and Reliance Equity Opportunities. Three scenarios were considered — daily SIPs, monthly SIPs early in the month (on the fifth), and monthly SIPs late in the month (on the 25th). NAV data from the lows of November 2008 to the highs until January end 2018 were taken into account. Result: Annualised returns from daily and monthly SIPs were almost the same.

In fact, the monthly SIPs often delivered marginally higher returns than daily SIPs. For instance, the daily SIP in HDFC Equity Fund has given an annualised return of 17.92 per cent, a tad lower than the 17.93 per cent return in the monthly SIPs on the 5th and 18.01 per cent return on the monthly SIP on the 25th. Similarly, the daily SIP in LIC MF Growth Fund has an annualised return of 12.96 per cent, slightly lower than the 13.06 per cent in the monthly SIPs on the 25th and the same as the monthly SIP on the fifth. What explains this? Monthly SIPs do sometimes suffer due to higher NAVs on the date of investment. If the market is rallying higher, this reduces the number of units for the investor.

But over the long run, this gets made up by occasions when the markets are lower on the SIP date. It’s a matter of luck as we don’t know in advance which days the markets may be up or down. That’s why monthly SIPs do as well or badly than more frequent SIPs. No surprise then that most mutual fund houses stick with monthly or quarterly SIP options.

But even where fund houses do not directly offer daily SIPs, investors can undertake daily systematic transfer plans (STPs), where funds can be moved everyday from one scheme to another — say, from a liquid (debt) scheme to an equity one. But this may not be worth the effort. Besides, an STP could have tax implications — returns on debt funds held for less than three years are taxed at the investor’s slab rates.

Operational hassles

Daily SIPs could suit investors earning daily cash flows, who have the need to deploy some money immediately or who run the risk of spending everything quickly without investing. But for most investors, more frequent SIPs could mean operational hassles. Most of us earn our income on a monthly basis.

So, it’s easy to keep track of investments that also go through at monthly intervals. With daily SIPs, your bank account could get swept clean if you haven’t kept track of it. A bank debit not going through will cost you money in terms of charges. Also, you need to be ready to sift through multiple pages of daily entries in your bank statements.

Monthly SIPs, in contrast, are simpler. You can fund them with your monthly salary; they are convenient to operate and keep track of, and won’t entail too much paperwork. So, you will be better off sticking with monthly SIPs.

Published on February 18, 2018

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