Should We invest daily in SIP Mutual funds?
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Updated date : 26 December 2019
SIP (Systematic Investment Plan) will help you invest money in a disciplined manner. If you would like to invest in mutual funds, you can choose either to invest your money in a lump sum or via an SIP. Financial experts recommend SIPs as the preferred mode of investment as they can absorb the market fluctuations very efficiently. If you are new to the equity market, you can explore SIPs as they are a safe starting point. In an SIP, you will buy units of mutual funds at an average price. The SIP investment can be done on a monthly or quarterly basis.
Types of SIP
There are different types of SIP. Monthly or quarterly SIPs are very popular. Now, you will be able to invest in daily SIPs as well. However, you should understand the profitability and tax implications before choosing such financial products.
- Monthly SIP - Monthly SIPs are very popular. They are offered by various fund houses.
- Weekly SIP – A fixed sum of money will be invested on a weekly basis.
- Daily SIP – You will invest a fixed sum of money on an everyday basis. Some people would like to invest a small amount of money on a daily basis. It can be done as per their convenience.
Daily SIP features
Instead of investing on a monthly basis, you can invest on a weekly basis or daily basis. To calculate your returns, you should use various parameters such as XIRR and CAGR.
- Convenience - Daily SIPs are convenient for businessmen.
- Account maintenance - You may want to use a different bank account to fund the daily SIPs so that the returns can be tracked very easily. However, it is not mandatory to use a separate bank account towards your SIP contribution.
- Automatic deduction - It is very important to set an automatic deduction option so that the money will be deducted automatically from your savings account and the contribution will be made to the mutual fund scheme. The returns earned from the fund will be credited to the bank account automatically.
- Dividend distribution - Even though you contribute to the SIP every day, you may not get the returns on a daily basis. The mutual fund company will distribute the profits in the form of dividends. If there are no profits, the company is not liable to declare the dividends.
- Dividend distribution tax – The dividend will be paid by the mutual fund company after the deduction of the dividend distribution tax. If you choose a growth fund, the returns will be reinvested and the overall gains will be quite high.
Benefits of Daily SIPs
- Returns – The daily SIPs are useful to achieve higher returns. If you invest when the market is climbing, the returns will be high. On the other hand, there may not be any returns if the market is on a downslope.
- Liquidity – If you invest in a growth fund, the investment will be locked. The early exit will attract an exit load (i.e. a fee charged from an investor for exiting the scheme). However, most SIPs allow investors to make partial withdrawals after a certain period of time.
- Convenience – For some customers, investing via daily SIPs is more convenient than via monthly SIPs. Hence, you can choose a mode of investing based on your convenience.
Extended Internal Rate of Return (XIRR) can be used to assess the performance of investments. If you participate in equity mutual funds through systematic investments, XIRR will deliver better returns. All the installments as well as the timing of investment will be included, while calculating XIRR.
The Compound Annual Growth Rate calculates returns based on the total investment. You will not get exact picture if the investment has been made in installments. The returns will be high when you choose a fund with a diversified portfolio. The Sensex is based on 30 stocks while the Nifty is based on 50 stocks.
You should consider a sip investment if you are looking for a flexible medium of investing that also offers liquidity and great long-term benefits.
Prospects of daily SIPs
The prospects of daily SIPs should not concluded based on stock indices such as Sensex and Nifty. The results are based on fund management. If the funds are managed efficiently, the returns can be good even if the market conditions are unfavorable. Hence, before investing in daily SIPs or weekly SIPs, you should consider the credibility of the fund house and the fund management strategy. The fund manager should play an active role by switching gears as per the market conditions.
- Limit losses – By managing the funds well, the losses can be minimized and gains can be maximized by choosing the right stocks.
- Market conditions – The growth of SIPs will be based on the market conditions. The primary purpose of an SIP is to absorb the market volatility and to strike the best price on the investment.
- Large cap funds – The volatility in large cap funds will be lesser than in small cap funds. The small cap funds will react to the market surge very sharply. Hence, you can expect stable results with SIPs which invest in large caps.
Difference between daily SIPs and monthly SIPs
The difference between a monthly SIP and daily SIP isn’t much. For example, Birla Sunlife Small and Mid-cap Funds will deliver the same results regardless of the nature of investment. You will not experience much difference between daily SIP and monthly SIP.
Diversification – By going for daily SIPs, you can diversify the investment. However, you should not over diversify your financial portfolio. As the purchase price is averaged, the returns will average out as well. However, if a fund is not very volatile, the returns of monthly SIPs will be higher than daily SIPs.
Drawbacks of daily SIPs
- Difficulty to track – There will be too many entities in the mutual fund scheme. Hence, it will be difficult to track your investments.
- Investment Planning – The investment can be planned better on a monthly basis. You can assess your income and expenses better on a monthly basis. Hence, you can implement the best investment strategy with a monthly income plan. The returns on daily SIP will be low.
Daily SIP from popular fund houses
Daily SIPs are ideal for investors who have daily cash flows. Traders prefer daily SIPs as it enables them to invest money on daily basis. Most traders invest money in unorganized sectors.
LIC and HDFC Securities have initiated daily SIPs to attract investors who explore the unorganized sector. The daily SIP is also useful for people who earn daily wages. They can take out a certain portion of their money and invest. If they fail to save money on a daily basis, they won’t have any savings. Hence, the daily SIP option will fulfill their needs.
Building corpus - With an SIP investment, returns begin accumulating. You can build a substantial corpus on a long-term basis. Even though the returns on daily SIPs are lower than those on other kinds of SIP, you will be benefited by building the corpus. You will be compelled to contribute money to the scheme and your saving potential will increase.
Power of compounding – The returns on your SIP investments will be enhanced by the power of compounding. As there is just a meager difference between monthly SIP and daily SIP, you should choose the SIP as per your convenience.
Age factor – The selection of fund and frequency should be based on your age as well. You should choose an SIP amount as per your financial goals. The investment potential will be higher when you start young.
Number of transactions – The number of transactions will increase from one per month to around 20 transactions per month. The cost-averaging will be low when the volatility in the fund is low. Hence, there will not be a big difference between monthly SIP and daily SIP.
Investment term – The daily SIP is ideal if you’re looking for long-term returns. The cost-averaging will be better and you can achieve high returns with daily SIP.
The returns in the equity market are in sync with Sensex and Nifty. Before investing in equity in either lump sum mode or SIP mode, you should be aware of these indices. The rate of returns is measured through various means including XIRR and CAGR. XIRR gives you better picture of returns on SIPs. There are some people who would like to invest small sum of money on daily basis instead of investing on monthly basis. So ensure that you choose a medium that works well for you.
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