Daily Systematic Investment Plan (SIP) in Mutual Funds
A SIP is nothing but a systematic investment plan, which helps to create a corpus to fulfill your financial dream. As the word suggests ‘systematic’ it means a consistent particular way of investment. It can be daily, weekly, monthly, quarterly, semi-annually or yearly, based on the suitability of the investors. Generally, all salaried persons opt for monthly SIP, reason the receipt of remuneration being once in every month. In recent times LIC and HDFC Mutual fund have initiated the daily SIP concept, but is it worth it? Let us first understand the concept of daily sip.
Concept. SIP is a sum deducted from your bank account to purchase certain amount of mutual fund units, at the NAV on the date of investment on a specific interval (monthly, daily etc.). Daily SIP is investment done on every day (working day) basis, where mutual fund units are purchased daily. Therefore the major difference in the other SIP and daily SIP is time gap between two investments.
Daily SIP Vs. Monthly SIP. A systematic investment plan is based on the principle of rupee cost averaging. In simple terms, whatever mutual fund units purchased on the specific intervals are bought irrespective of the market volatility. Thus sometimes fewer units are purchased when the NAV is higher and vice versa, resulting in averaging of the overall cost. Now speaking about daily SIP, the cost averaging concept will help, only if there is high volatility in the NAVs, otherwise it would be futile. In addition to that, from a broader perspective, higher the interval, higher the volatility, which equals higher returns, hence monthly SIP might just be a better prospect. However expert believes that in the long run daily SIP may beat monthly SIP in cost averaging. Finally looking at the overall perspective here are the reason why monthly SIP is a better option than daily SIP
- Better Tracking – Daily SIP increases your banking transaction significantly, making the trace of your investment difficult to read. In addition to that, your bank entries will render it troublesome, to know whether all the SIP transaction were successful. Monthly SIP would result in only one entry in the bank statement, making the track of investment fuss-free.
- Keeping the account debit ready – Since daily SIP would always require your bank to account to be sufficiently balanced, it may run into trouble. One will always have to keep the bank account debit ready in order to avoid the unnecessary charges. Monthly SIP being once in a month, keeping the account sufficiently balanced once a month is a much easier task.
- Better Planning – An emergency situation may create a shortage of funds, and daily SIP may add to your woes even further. Monthly SIP one can plan in a better way to deal with any emergencies.
- Amount restriction – Many SIP has a specified minimum investment amount. If the minimum investment amount is said Rs. 500 you may end up investing all the savings into one SIP (22 x 500 = 11000). Monthly SIP, in this case, opens up large avenues along with investment in two or more funds at the same time. Since the investment period is once a month you may invest 5000 in one SIP and 5000 in other or in any combination as per suitability.
- Crowded Bank Statements – Imagine investing in two daily SIP and finding an entry at the end of March? Daily SIP will over crowd your bank statement unnecessarily by causing debit to your bank account every day. Monthly SIP results in to ease of investment and convenience, which helps you identify your bank entries as well as your investment entries easily.
- Liquidity – In case of a mutual fund with a lock-in period, daily SIP will release only that part of your investment which was invested first. In simple terms, if you have invested 100Rs. Per day in lock-in units and purchased say 10 units on 1-1-2019, the first withdrawal will be allowed of only those units on 1-1-2022 at NAV, rendering into a very insignificant amount. In another way in case of monthly SIP, you end up purchasing higher units and thus at the time of withdrawal you will receive higher amounts.
Let us look at how daily SIP is advantageous.
- Eases out Volatility – The biggest drawback of monthly sip can be if the markets are high on the particular day of investment, you may end up purchasing very few units. In case of daily SIP, the volatility is eased, by consistent purchasing, therefore the NAV at which the units get purchased is scattered.
- Suitable of low-income group – Investors, who are earning money in the form of daily wages, will have to save the money for a whole month to invest in monthly SIP, which is very difficult. Therefore daily SIP can help them to gather a small portion of their daily earning and invest it directly into SIP instead of gathering it into their bank accounts.
- Better discipline – In daily SIP, the amount is deducted every working day, leaving your bank account debited before you start spending. These results in the adoption of saving first spend later philosophy, which creates a better discipline. In monthly sip, one has to wait until the start of the month, and there is every chance of not keeping the account sufficiently balanced.
The systematic investment plan, is a perfect way to start with your savings, be it daily, monthly or in any other interval. Daily SIP helps you east out the volatility but speaking broadly if the investment tenure is long term (5-10 years) daily SIP won’t make much of difference.