By: Tavaga Research
What is SIP?
Systematic Investment Plan (SIP full form) or SIP is a disciplined way of investing a predetermined amount of money at regular intervals. SIP investment facility is offered by mutual funds that allow the investor to invest a fixed amount of money periodically in a mutual fund scheme. The frequency of investment can be daily, monthly, quarterly, or yearly in a fund but the monthly option is the most popular.
Benefits of Investing in SIP
Rupee cost Averaging
SIP is usually a better investing strategy rather than a lump-sum investment as it helps to reduce the average cost per unit of investment through a method called Rupee Cost Averaging. Investing in SIP eliminates the need for investors to actively time the market and he/she can benefit by buying more units of the equity fund when the price falls and lesser units when the price has risen.
Power of Compounding
Compounding occurs when the returns that you earn on your investments also start earning returns.
By consistently investing in equity funds through SIPs over long periods of time, your returns also get reinvested. Over time, this results in a snow-ball effect which increases your potential returns manifold, thus helping you earn from the power of compounding. This helps the investor build a large corpus in the long-run, even with a small amount of investment.
Low initial investment
SIPs help you to invest with as little as Rs. 500 per month. Thus, it is an affordable way to invest each month without hurting your wallet. One can also increase the monthly investment amount via SIP step-up feature.
SIPs are a convenient way of investing for someone who does not have the time and expertise to do extensive market research and analysis to frequently adjust or balance your portfolio. For such investors, it is best to select a good fund and start the SIP process without worrying about daily market fluctuations.
Before we decide the frequency and date of SIP, let us first remember some of the golden rules of investing in an SIP
Which SIP is better? Monthly, Weekly or Daily?
While monthly SIPs are the most popular, investors can customize the way they put money via SIPs by investing fortnightly, weekly, or even daily, as per their convenience.
Is it a good idea to increase the frequency of SIP to weekly or even daily to get better returns on your investment? SIPs help an individual invest in equity funds across different market levels and it, therefore, helps in averaging out the cost of investment. A popular notion is that if the frequency of SIP is increased it will help capture more market volatility than just once-in-a-month investing.
Studies have pointed out that SIP frequency, whether it is daily, weekly, fortnightly, or monthly does not have a significant impact on investment returns. The actual returns make a sizeable difference only over long periods of 10,15 or 20-year period. Thus, a specific frequency for investing in SIPs is not superior over another.
…what if we miss out on sharp market movements just before our SIP date?
One can argue that if there is a very sharp rise in the stock markets just before you make an SIP, you could miss out on that gain and that a daily SIP would have helped to capitalize on it. One has to however remember that such sharp movements in stock markets are not very common. And even if there was a sharp movement, one SIP is only a small portion of the overall investment that you will make, over, say a five, ten or fifteen-year period.
Thus, in the long-term, the return on your investment will not be impacted by changing the frequency of SIP.
Daily SIPs could be very tedious to track and manage
Digital investment platforms have made SIPs very convenient at any frequency which the investor prefers. But keeping track of daily SIPs could be a very cumbersome affair.
Which Is the Best date for SIP Mutual Fund Investments?
Our fancy for higher returns never ends! A very common question that is often asked by new Mutual Fund Investors is “which is the best date for SIP investments?” Is it the 5th, 15th or 20th of every month or any other date?
For this we did a small exercise wherein we took the HDFC top 200 fund from 1 January 2017 to 30th November 2021 data. It is almost 5 years of data with around 59 values and respective HDFC top 200 fund values.
We considered the SIP dates like 1st, 5th, 10th, 15th, 20th, 25th of each month. If these dates happen to be market holidays, then the SIP is considered for the immediate next available value.
The result has been populated in the table below and the difference may not be visible much. The difference between the lowest and highest XIRR returns is marginal. By looking at this data, we can safely conclude that SIP dates do not matter. Choose a date that is most convenient and keep investing consistently and hold for the long term. The bottom line is that the returns generated from SIP will not significantly differ if we choose different SIP dates.
SIPs offer the beauty of simplified investing and inculcate discipline in the investment process. Opting for more frequent SIP may unnecessarily complicate this process and make managing investments a headache without any significant rise in returns, especially if you are investing for the long term.
Also, one should move away from timing the market and not choose particular dates in the hope of higher returns. Don’t miss out on the biggest SIP benefit, which is that you’re investing. This is more important than how frequently you set the SIP or at what date of the month you are investing.
Team Tavaga has developed an SIP calculator / SIP Return Calculator for all our readers. You can check it out here!
The above example of HDFC Top 200 Fund is only a representation. Team Tavaga promotes investing primarily in index funds and ETFs, where there is absolutely no fund manager risk attached. The result of investing on any date during the month has been similar. The goal is to not time the markets, but invest systematically atleast every month.