Is Monthly SIP Better or Yearly SIP?

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It is very easy to see a dream but what you do towards making it a reality is what makes all the difference. That is something which makes you stand out and come out as a winner. The same is the case with building your empire financially.

SIP or Systematic Investment Plan is a tool which helps you achieve your financial dreams and aids you towards a better future. With the help of SIP investments, you can start investing small amounts, one instalment at a time, over a period of years and grow your wealth.

Here, you get the power of compounding and it will work wonders if you keep investing for a longer period of time. It is the time which you spend while investing and not the time at which you start your investment which matters. So, start the journey now towards a better future.

When it is about starting investments today, the first two things that strike in your mind are mutual fund investments and SIP. Mutual funds not only help you with wealth creation but also aid you in tax savings and attaining financial freedom.

Along with mutual fund investments, SIP investment too, is growing like anything today. As per the AMFI, as of 2017 there were 1.31 crore operational SIP accounts and about six lakhs are being added every month.

With the help of SIP, you can buy units of mutual funds as per your convenience and budget. Normally, investors try to keep the SIP debit date close to the salary date to avoid any last minute payment discrepancies. The money gets auto debited from your bank account as per the standing instructions given to the bank. It also helps in instilling financial discipline in the investors.

How to Start Investing in SIP?

You can directly buy mutual funds from the direct fund houses, either via online or offline mode or both of them. A SIP account can either be opened by visiting the nearest branch or can also be done online, depending upon your preference. The funds can either be bought as a lump sum or through SIP over a period of time. You can also buy mutual funds with the help of agents. You simply need to open a trading account and fill out the mandate KYC to start the transactions.

How to Choose the Right Fund?

There are so many fund options available today that it becomes extremely difficult to decide which one would be best for you.

The different mutual fund schemes available are further divided into equity, debt or hybrid funds. The mutual fund you’ve chosen should be well in line with your end goal. For example, if your goal is to have an early retirement, you need to choose the fund which will help you in growing your money in the least amount of time. Make it a point to check the long-term performance of the fund, how the fund manager had performed and what the expense ratio is. All this data can easily be sourced online on the fund’s website.

Which Option to Choose?

Usually, all the funds available these days provide you with two options to choose from- dividend or growth. If you choose dividend fund option, you’ll be paid according to the fund due date periodically.

However, with the growth option your dividends are reinvested giving you better returns and high net asset value. You can choose either of the options based on your needs and choices.

Which one to go for - Direct or Regular? 

Almost all the funds available today have two alternatives- direct or regular. The direct one is sold directly by the fund houses and there are no intermediaries in between. The regular one has agents and mediators in between and therefore has a higher expense ratio leading to in lower returns. If you are looking for long-term investment options, direct funds will be a better choice.

What should be the investment amount?

The main benefit of SIP investment is you can invest any amount you wish to, which can be as low as INR500 on a monthly basis. Different schemes have different minimum values. In order to calculate the end return you want, you can calculate how much to invest with the help of a SIP calculator.

Like, if you need Rs 1 crore in the next 20 years, you need to invest INR.10000 on a monthly basis in the scheme which will give you 12 % returns annually.

How returns work?

The returns of all the funds work according to the prescribed dates and it can also be availed on the fund's website. Take your time to understand the short and long-term returns to get a clear idea about the performance of the fund.

The risks involved

There is a saying that with great risks come the great results. Similar is the case with SIP investments. If you are willing to take risks, you can easily get some good returns. The returns are basically based on the volatility of the market and how they work.

The equity funds are invested in the stocks and the returns totally dependent on the stock’s performance in the market. Debt funds are usually invested in the government bonds and treasury bills, etc. and are considered to be low-risk options. But even these cannot be termed as no risk due to the microeconomics involved here.

How does taxation work here?

Post completion of the fund tenure, when you go on to redeem your investment, basically the units you had invested they are redeemed on a first in first out basis. The units which you purchased in the beginning will be redeemed before the units that you purchased later on.

Equity funds considered to be long-term investments are exempted from long-term capital gains tax. When you choose to redeem equity units before one-year completion, you will have to pay short-term capital gain tax at approximately 14.5%. Equity returns are tax-free for an amount of up to Rs 10 lakh a year.

Debt fund investment is considered to be a long-term investment only after successful completion of 3 years and that is when you will be able to avail of the tax benefits. These funds are taxable at a rate of 38.45%.

How to track your SIP?

SIPs need to be tracked just like any other investments. Although they are considered safe and most reliable, you just cannot leave them untouched. The performance can be tracked with the help of mutual fund statements. If you see any deviations and the funds’ performance is not as per the expectations you had, you can switch it any moment or redeem the units you invested.

Comparison of SIP Investment - Monthly or Yearly?

Now that you know all about SIP investment, the big question arises - which is the best investment tenure? Should you invest in a Monthly SIP or an Annual SIP?

Though many people are aware of monthly SIP investment, they are not that well versed with the annual one. The answer lies with you as it’s you who needs to make the decision about the tenure.

Now the best way to decide about this should be based on two options- by using a SIP calculator and without using a SIP calculator.

Scenario 1

Assuming Mr A keeps a part of his monthly salary aside for the SIP investment before making any other expenses. He need not to worry about the frequency of the investment as long as his cash flow frequency and investment frequency is the same. It becomes difficult when he does not have a regular cash flow as it will affect his investments. In such scenarios, he might consider a yearly SIP investment option.

For people who are not able to make a decision based on what suits them and what does not, the only option left is to follow the math route and do some basic calculation before making a decision. There are various SIP calculators available that can help you compare the returns based on your investment frequency- monthly or yearly. The calculation are based on the NAV history of the mutual funds and the results can be calculated for any investment period if the data of NAV is available for that particular period.

Which SIP Investment provides better returns?

It is a common belief that more disciplined SIP investments gives you more returns. More of regular investing will help you be at par with the market volatility as you will be investing during both high as well as the low times. The result will be perfectly averaged. For SIP investment which has a huge gap between investment times, if the market goes up on the date of the investment, you will lose out on the benefits.

On the other hand, for the cases where you are investing on a daily basis, you don’t need to worry about the market movement and  keep a regular tab on it. This is because, you are making the investments on a regular basis and the market is open for you on all days.

When it comes to returns, the longer period of investment will not make any difference on the return value much, irrespective of the tenure you choose. As per the various studies conducted, there is hardly any difference of 1 to 2 percentages in daily, monthly and quarterly SIP investments. Although daily SIP investments have given higher returns at all times, still it has always been marginal.

SIP Investment and Cash Flow

As mentioned many-a-times earlier too, SIP investments should always be assigned to your cash flow and income. For salaried individuals, a monthly SIP should be the most convenient option as they get their salaries on a monthly basis and can make the investments regularly. They can easily give an ECS instruction to their banks in order to ensure money is deducted from their banks on a particular date.

It is ideal to keep the debit for the first week of every month so that the other expenses can be planned accordingly. For making the SIP investment on a daily basis, they need to make sure they have sufficient funds throughout and the investment is not hampered.

The main purpose to have a daily SIP investment is averaging the cost of investment. Giving to this daily theory, SIP is the best option and serves the purpose well. Usually daily SIP investment is not recommended due to many reasons.

The most common one is your bankg may refuse a daily fund transfer from your account. Secondly, you will also have a chance of missing out on the payment which will hamper your investment. The last and the most important one is calculating the tax will be a real trouble from the capital gains.

It is ideal to stick to monthly SIP investment as quarterly SIP is not versed in capturing market movements. And also having a daily SIP investment will end up resulting in 25-30 bank transfer entries and it can be a task to keep a tab. Therefore, the most recommended period for SIP investment is monthly.

Risk Factor

While deciding to choose a SIP investment option, it is also crucial to keep risk part in mind and not only the cash flow part. Lower the SIP investment frequency, the higher the risk, as the market will fluctuate and you will not be able to keep a tab.

The frequency of investment should be based on your capability to take risks. In such scenarios, mostly, monthly SIP investment is recommended as it also gives you an edge over other tenures along with the benefit of averaging rupee cost and also helps in managing the flow of cash. Even if you get a hefty amount keep it systematic and invest accordingly.  At the end of the day the decision is yours to make and you know your wealth goals better.