Last month (December) saw SIP (systematic investment plan) contributions of a record Rs 11,305 crore. I am pretty sure that a vast majority of these SIPs were of monthly frequency. But investing monthly is not the only option. There are a few more varieties out there: Fortnightly, Weekly and even Daily!
What these options do is that they take the concept of Rupee-cost averaging a step further.
So, for example, instead of investing Rs 20,000 once a month, one can invest Rs 10,000 each fortnight, or Rs 5000 each week or Rs 1000 daily (assuming 20 market days in a month).
My view on SIP is that it is a small investor’s best bet. But do we really need to complicate this simple concept any further? Do we really need to increase the frequency of SIPs to weekly or daily? And can more frequent SIPs really help generate better returns?
Ideal for the long term
SIPs are best suited for the long term. And when you invest for the long term, then the frequency of your SIP (whether daily, weekly, fortnightly, or monthly) doesn’t have a major impact on the returns. Of course, if you look at the historical data, then you will find one or the other option doing better than the monthly one. But it is not necessary that the same will be repeated in the future. Also, different schemes, fund categories, SIP tenures will throw up different winners. So, it’s a futile exercise though there isn’t anything wrong in following one over the other.
Some investors feel that by doing a daily or a weekly SIP, they can benefit from sharp market movements. This is right to some extent. A case in point is the month of March 2020, when markets fell nearly 35-40 percent in less than a month. But here, the problem is that one month’s worth of SIP (whether monthly or weekly or daily) is a very small portion of the overall investment that one makes over several years. So it won’t matter that much.
If one really wants to take benefits from sharp periodic market corrections, then that is best done via making a few lump-sum investments that supplement the regular SIPs.
Also, daily SIPs can be very tedious to keep track of and manage. You might not feel this upfront but when you liquidate your MF holdings (that you accumulated using daily SIPs), it can be quite cumbersome. Why?
The tax angle
That’s because at the time of redemption, one has to file capital gains in the tax returns. And then you will have to report capital gains for each daily purchase. Monthly SIPs are far easier to manage in that respect. A daily SIP only adds an additional layer of complexity at the time of tax filing.
No matter what the past data suggests, there is nothing to prove that a daily SIP will do better than a monthly one in the future. So it’s best to select your SIP frequency based on your investment time horizon (anything above a few years you should simply opt for monthly SIPs) and your own convenience.
Monthly SIP is a simple concept. A more frequent SIP, in my view only complicates this process unnecessarily and doesn’t add anything to the long-term returns. If you are investing for the long term (say 10-15+ years), then whether you do a monthly or a daily or weekly SIP does not make much of a difference in returns.
But if you really want to have a more granular SIP than a monthly one, then it’s up to you. Go ahead and do it. And for those with irregular cashflows, like someone who has an irregular business income and finds it tough to manage monthly SIP, then they can even go for a quarterly SIP instead of a monthly one.
And let me zoom out a bit. It is not whether your SIPs are done daily or monthly that will matter in the long run. Instead, it’s whether you doing SIP for right amount or not that will decide how much wealth you accumulate.
Disclosure: My personal SIPs are monthly in nature as I find that frequency most convenient. My clients are also recommended monthly SIPs to keep things simple.