Recently, during one of our mutual fund workshops, we got an interesting question. Are daily or weekly SIPs better than monthly SIPs? The claim is that increasing the frequency of your mutual fund investments will improve your returns. Today we’re going to explore this claim and figure out what frequency works best.
Why go with an SIP in the first place?
You can invest in mutual funds in two ways – through a lumpsum or via the SIP route. The SIP (Systematic Investment Plan) route has gained popularity over the past decade mainly due to the simplicity and discipline it brings to one’s investing journey. What an SIP also does is average out the cost of your investments over time. You invest a predetermined amount on a fixed date every month irrespective of how high or low the market is. Consequently, you end up buying more units when the market is low, and lesser units when the market is high. In fancy financial parlance this is known as rupee cost averaging. Trying to time the market to invest when it is at its lowest doesn’t even come into the picture.
Choosing the appropriate SIP frequency
Now that we’ve established that investing at regular intervals trumps investing lumpsum amounts every now and then, let’s come to the frequency of these investments. Should your SIP be daily, weekly, fortnightly, or monthly?
Here are four factors that will help you decide.
1. Your income cycle
For those who earn daily or weekly wages, setting up a daily or weekly SIP might seem like a good idea. However, during periods of no income, it can be difficult to keep up with this high frequency of investing. And this can have a negative impact on one’s cash flow.
People in some countries, such as the US, earn on a fortnightly basis. In this case fortnightly SIPs make sense. But when one earns monthly, it is best to opt for monthly SIPs.
2. Your budget cycle
Your income and budget cycle go hand in hand. Ideally, monthly budgets work well, especially if you earn monthly. The 30-day time frame is neither too long, nor too short to assess your spending pattern. So, depending upon the frequency of your budget, your SIP frequency can be matched so that all three (income, budget, and investments) are in-line.
3. Returns
When it comes to return on investments, there is no study to prove that higher frequency SIPs result in higher returns. You might think that rupee cost averaging will work more effectively. However, there is materially no difference in what you gain through a weekly SIP versus a monthly SIP.
4. Taxation
Investing daily, weekly, or fortnightly gives rise to a huge number of transactions. This leads to complex tax calculations when you redeem your investments. Think 52 transactions per year, as compared to 12 transactions per year. Yes, there are new-age digital platforms to help you out. But why overcomplicate things when there is no real benefit? Four times as many transactions of smaller amounts, all at different NAVs, only make for longer bank statements, mutual fund statements and tax statements. Totally unnecessary.
Monthly SIPs are the way to go
Investing is a long-term, and lifelong, activity. Starting early and being consistent with your investments are two of the simplest ways to stay in good financial shape. With an SIP, you automate the decision of when to invest.
For bonuses and other such one-off earnings, you could supplement your SIP with a lumpsum investment. You could also consider these lumpsum supplements when you want to take advantage of sharp falls in the market. Do not replace your SIP though. That is the one of the pillars of your financial plan. An underrated, yet powerful tool for your investments, SIPs need not be taken to the extreme. Picking a sensible frequency, one that isn’t tedious to keep track of, is the way to go. A monthly SIP is simple and effective. And as Steve Jobs said, “Simplicity is the ultimate sophistication”.
