Over a full market cycle, monthly SIPs fare better. However, they lose out to daily SIPs in a falling market.
A regular investment habit brings in discipline among investors and wealth is created with long-term planning. The best way of creating wealth over a period of time is through the systematic investment plan (SIP).
SIP is ideal for investors who have a regular income and want to stay away from the market volatility. It makes you invest a fixed amount regularly. When the market is high, you buy fewer units and at a lower level, you get more units. Rupee cost averaging and compounding are the added benefits you get here.
Apart from the monthly SIP, there is another variant called daily SIP – a boon for investors with a low risk appetite.
What is a daily SIP? It enables you to divert a small sum of money on a daily basis. Daily SIPs are expected to minimise risk and generate greater risk-adjusted returns while increasing participation.
The working of this scheme is similar to that of monthly SIP, wherein the units will be allocated on the basis of net asset value (NAV). You can choose the amount and period of investment as convenient to your pocket. This will automatically be debited from your account on every working day for the investment period stipulated.
The installment amount can be as low as Rs 10 a day. And the scheme can be terminated any time, with an advance notice and without any extra cost.
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Currently, L&T Mutual Fund, Bharti AXA Investment Managers, Sahara Mutual Fund and IDFC Mutual Fund offer this facility.
Monthly versus daily SIP: Let’s understand this by way of an example assuming two scenarios.
Scenario 1: Assuming two different styles of investment by Shalini and Sonal over a period of three years that began in January 2008. Shalini started a monthly SIP in Nifty with a contribution of Rs 5,000. On the other hand, Sonal started investing in Nifty on a daily basis, which amounted to Rs 244 a day. If we look at both their investment benefits till May 2010,Shalini benefitted more. Reason: during this period, the markets went through a full cycle. As evident, in a longer period, monthly SIPs provide good averaging.
| Scenario 1 | ||
| Monthly SIP | Daily SIP | |
| Total units | 42.10 | 41.98 |
| Avg cost price (Rs) | 4,487 | 4,495 |
| Closing price (Rs) | 5,086 | 5,086 |
| Investment (Rs) | 1,80,000 | 1,80,000 |
| Value (Rs) | 2,14,157 | 2,13,531 |
| Returns (%) | 18.98 | 18.63 |
Scenario 2: Now let us analyse their benefit in the period when the stock market fell steeply – January to December 2008. The investment for this period was Rs 60,000.
| Scenario 2 | ||
| Monthly SIP (Rs) | Daily SIP (Rs) | |
| Total units | 14.17 | 14.56 |
| Avg cost price (Rs) | 4,455 | 4,339 |
| Closing price (Rs) | 5,086 | 5,086 |
| Investment (Rs) | 60,000 | 60,000 |
| Value (Rs) | 72,060 | 74,073 |
| Returns (%) | 20.10 | 23.46 |
During this period, Sonal scored better than Shalini. Reason: daily SIPs have a way with a volatile market, more so on the downtrend. It may not be as effective in an uptrend or in a range-bound market. Deeper the market dips, the better is your holding averaged with daily SIPs.
A daily SIP needs a little more monitoring than a monthly one. A daily SIP would score better when a large part of your investment comes is made in a rapidly falling market. A monthly investment may not be best suited for cost averaging.However, over a full market cycle, it could end up being as fruitful as your daily SIP, if not better.
For someone looking at a three-five year period, it is ideal to stick to a monthly SIP. This could be considerably less taxing in terms of monitoring and on your pocket as well. For an investment horizon of less than that, preferably six months to one year, daily SIP can be a good choice.
Word of caution: The negative about this product is the transaction load – fund management fee and auto debit from your bank account. One should avail this investment arrangement only after carefully evaluating these aspects.
The writer is CEO, Right Horizons