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.
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.
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.
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.
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
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.*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
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.