SIPs: Investors better off with monthly investments as it's easy to track

As investor are increasingly looking at systematic investment plan (SIP) to invest in mutual funds, a few distributors and fund houses have started offering variants of SIP. LIC Mutual fund has started a daily SIP option with a minimum investment amount of Rs 300 a day. HDFC Securities is offering the same for HDFC Mutual Fund at Rs 500 a day.

SIP helps investors to make the most of market volatility by averaging the cost of investments and removing the need to time the market. By this logic, can investing a small amount in the market daily instead of every month help investors get better returns? Investment managers and analysts don’t think so. “If you compare the returns of daily investments with monthly over the long term, there is hardly any difference,” says Vidya Bala, head-mutual fund research, FundsIndia.

Investing every day leads to excessive averaging, which does not help in improving returns. It is similar to over-diversification in a portfolio. To get better returns, an individual needs to spread his investments in a basket of stocks or mutual funds. But adding too many of those leads to plateauing of returns.

Daily SIPs can also create operational hassles. Imagine having about 25 SIP transactions every month from your bank account. It could pose a problem for your account statement analysis. Things can get cumbersome if you sell funds and need to calculate capital gains on the profits. You will have too many entries to track for calculating the tax. Also, if someday you don’t have the required funds in the bank account, and the SIP bounces, the bank is going to levy a penalty. Investment advisors, therefore, suggest opting for monthly SIP over daily or even weekly investments.

HDFC Securities is offering daily SIP as there has been a demand for it from some customers, who frequently trade in stocks. “These customers want to transfer the profit made in trading to their long-term portfolio,” says Sambasth Kumar, head – products and distribution, HDFC Securities. Kumar says that when they calculated the difference in returns between daily and monthly investments in various schemes of HDFC Mutual Fund, there was hardly any difference between the two over the long term.

LIC Mutual Fund started offering daily SIP to ensure that retail customers inculcate disciple, save more and cut down on unnecessary expenditure. “We found that a customer spends has an average spend of Rs 300 on expenses such as eating out, watching a film, travelling via app-based taxis, etc. We wanted them to also think of savings along with such expenses,” says Rajesh Patwardhan chief marketing officer, LIC Mutual Fund.

If more customers opt for this option, it will also help LIC Mutual Fund increase its average ticket size of SIP book, which is in the range of Rs 3,800-4,200 at present.

Patwardhan, however, feels that daily SIP can help investors make around 0.30-0.45 per cent more annually than monthly SIPs going forward. “This year, markets are going to be volatile due to various factors. Investors can make slightly better returns in daily SIP if markets remain choppy,” says Patwardhan.