Should one invest in daily SIP in mutual funds?
‘Disclaimer: This story is for informational purposes only and should not be taken as investment advice.'
Although mutual fund houses offer daily, weekly, monthly, quarterly, semi-annual SIPs, but most investors are familiar with monthly SIPs. Recently, LIC Mutual Fund launched daily SIP in its mutual fund schemes and HDFC Securities started offering daily SIP schemes in HDFC Mutual Fund.
The most common question asked by the investors on whether they should invest in daily SIP schemes and why should they opt for it.
"Daily option in SIP will appeal to those investors who earn daily cash flows and currently invest a portion of this with unorganized private financiers, including chit funds which are highly risky or let the money remain idle in their bank accounts," Deepak Jasani, Head - Retail Research at HDFC Securities, told ET.
Alok Agarwala, senior VP and head - Investment Analytics, Bajaj Capital, told ET that the daily investment option in SIP is suitable for those belonging to lower strata of income who earn daily wages.
"It is important for them to take out a portion of their daily earnings and invest; otherwise, they would end up spending the whole sum and will be left with no savings at the end of the month," he added.
SIP or Systematic Invest Plan is a disciplined way of investing a particular amount at regular intervals in mutual fund in order to accumulate a corpus.
According to experts, it helps investors to steer clear of timing the market and average the cost of purchase of mutual fund units over a long period. Another benefit of a SIP is 'power of compounding'. Sooner, you begin, more time your money has to grow. An example, will make it more clear.
An investor, who is 30 years old, needs to invest Rs 2,860 per month to reach a corpus of Rs 1 crore at the age of 60, assuming 12 per cent annual rate of return. But, if he starts at the age of 40, he will need to invest Rs 10,100 per month to reach the same corpus at age of 60, reports ET.
The most common question that investors ask if one actually needs the daily SIP option to build wealth?
Experts say this scheme helps those who earn a daily wage or with daily cash flows to invest in a disciplined way.
Monthly salary earners, on the other, would be keeping the required money in the bank account to daily SIP as they don't have any cash flows other than monthly salary. Is it desirable? The daily SIP option would also increase number of transactions from one per month for a monthly SIP mode to more than 20 transactions a month for daily SIP option, as reported by ET.
"The average entry cost in daily vs monthly SIP is a function of intra-month volatility. It will depend on how sharp the deviations were for a month," Deepak Jasani told ET. If volatility is not very high in a month, it will result in very little cost averaging, which will defeat the purpose of SIPs. However, Jasani adds that over a longer period, there is a possibility daily SIP would result in better cost averaging and higher returns (by 20-40 bps per annum) than monthly SIP.
Alok Agarwala told ET that monthly or even weekly SIP options are sufficient to provide better risk-adjusted returns than markets. "By investing daily, you will be minimizing volatility. Also, the daily option will unnecessarily increase number of transactions in your portfolio, which might become difficult to manage," he added.