Daily vs Monthly SIP: Who’s The Winner?

Systematic Investment Plans (SIP) are synonymous with Mutual Funds. These are plans in which you invest a regular amount in a Mutual Fund over a period of time. This method is often recommended by financial experts in case you are new to the equity market or if you are not the risk taking type.  The biggest advantages with SIP are that it averages out the cost of purchasing Mutual Fund units and it lowers the risks associated with timing the market.

But, how frequently should you be investing through the SIP route? As you know, monthly SIPs are pretty popular. Today, you can invest in SIPs every day. So, what are daily SIPs? In a daily SIP you invest a fixed sum of money through the SIP route in a Mutual Fund every business day. Some people may feel that investing a small amount every day is better than investing a large amount every month. But will this help? Will it give you better returns as compared to investing every month? What are the pros and cons? We did some calculations to find out.

The showdown

In India, equity markets are synonymous with the Sensex and Nifty. So, we decided to take these two indices into consideration. What will be your returns if you had invested in these indices for the last 3 years? For this purpose, we used the X Internal Rate of Return (XIRR). We have not chosen to use Compounded Annual Growth Rate (CAGR) because XIRR is a better measure. How? XIRR takes into account every amount that you invest and every point in time when the money is invested. CAGR only considers the total amount invested, which will not give you exact returns if your investment is made in installments. Since SIP involves investments made in instalments, XIRR will be a better measure than CAGR.

Coming back to our issue, if you had invested in our popular index, the Sensex, every trading day for the last 3 years, the XIRR would have been about 7.37%. What if you had invested every month in the Sensex for the past 3 years? In this case your XIRR would have been 8.57%. Before you conclude anything, let us look at one more figure. If you had invested in the Sensex every quarter for the last 3 years, your return would have been 9.10%.  So, does this mean that quarterly SIPs are better than monthly and daily SIPs? Wait! Don’t take a decision yet. Let us also look at Nifty, the competitor for Sensex (or should we say peer?). If you had made daily SIPs in the Nifty for the last 3 years, your investments would have earned you 8.70%.  Monthly SIPs in the Nifty would have given you 10.32%. Now what about quarterly returns? If you had invested every quarter in the Nifty, your returns would have been 10.78%. Looking at the data, quarterly and monthly SIPs seem better than daily SIPs. Also, did you notice that the Nifty seems to have given better returns than the Sensex? This is probably because the Nifty consists of 50 stocks while the Sensex has only about 30 stocks. This reduces the volatility of the index, especially during turbulent times as we have seen in the past 3 years. This is precisely the reason why you should invest in Mutual Funds as they provide diversification across stocks and sectors.

Additional Reading: How To Meet Your Goals With Mutual Funds

Focus back on SIPs! Does this mean that daily SIPs are bad? We obviously cannot conclude anything based only on investments in indices. This conclusion can be applied to index funds that base their returns on an index. However, things might be different for actively managed funds whose portfolio keeps changing. Actively managed funds are funds where the fund manager will trade in different securities in a bid to limit losses and maximize gains. This will be done by buying and selling shares as per the Mutual Fund’s mandate. So, the returns for these funds will vary accordingly. So, we decided to pick some funds to do some more research on which SIP will work.

First, we took a popular equity diversified fund that invests in large cap stocks. Typically investors who want to invest in Mutual Funds start with these funds because these funds are less volatile when compared to other equity funds. The fund we considered for our calculations is the Franklin Bluechip Fund that is one of the top performing funds in the equity diversified category. If you had used daily SIPs as the means to invest in the Franklin Bluechip Fund, you would have earned a return of 15.11% in the last 3 years. What if you had invested through monthly SIPs in the same fund for the past 3 years? The returns would have been higher at 18.92%. Did quarterly SIPs give better returns than monthly ones? Not exactly. If you had invested in Franklin Bluechip Fund through quarterly SIPs for the last 3 years, your return would have been 16.80%. Looks like monthly SIPs are the best bet here.

But, let us look at one more fund before we come to any conclusions. This time we will take a fund that will be much more volatile than an equity diversified fund. We will be using a small and mid-cap fund. These are funds that invest in mid-sized and small sized firms whose stock prices are much more volatile. So, the fund will also be volatile. In this scenario as well, we chose a top performing fund, Birla Sunlife Small and Mid-cap Fund. If you had invested in a daily SIP in this fund for the last 3 years, your returns would have been an outstanding 29.93%. Monthly SIPs seem even better. If you had invested through monthly SIPs in this fund for the last 3 years, you would have earned 30.82%. Will quarterly SIPs fare any better? Actually, they didn’t! Quarterly SIPs in this fund would have earned you 29.72%. So, we can safely conclude that monthly SIPs give the best returns for equity funds.

Additional Reading: Benefit Yourself By Investing Through SIPs

However, did you notice that SIP returns change from fund to fund? What could be the reason for this? It’s volatility. When a fund is highly volatile, the difference between daily and monthly SIP returns are not very significant. The same goes for quarterly returns. For volatile funds, the difference between daily, monthly and quarterly SIPs will be very little, like in the case of the Birla Sunlife Small and Mid-cap fund. If the fund is not very volatile, you could actually lose by investing more frequently. Understand that diversification is the key to ensuring that your investment is a successful one. However, both over-diversification and under-diversification are bad for your returns. So, using daily SIPs might actually result in over-diversification. When you invest every day in the market, you are averaging out the returns too much. This will only lead to lower returns from your investments. So, considering the volatility of the fund, when a fund is less volatile as opposed to its peers, monthly SIPs will give better returns than daily SIPs. You can conclude that the lower the volatility of your fund, the higher would be the returns from monthly SIPs.

How they stack up

*Source: BankBazaar Research

Period of investment for daily SIPs has been taken as 740 business days. For monthly SIPs, we have taken it as 37 months, and for quarterly SIPs, it would be 13 quarters. The total investment amount has been taken as Rs.75,000 invested over a period of 3 years between August 2013 to August 2016. All returns indicate X Internal Rate of Return (XIRR).

Now, what about debt funds? These are funds that invest in fixed-income securities. As you know, they will hardly fluctuate on a daily basis. This means that you strictly shouldn’t be investing in daily SIPs through these funds. In fact, quarterly SIPs might work better for these funds in comparison to monthly SIPs since the changes in these funds are more likely to be seen over a quarter rather than month on month. Note that making SIPs in debt funds might not be as beneficial as SIPs in equity funds. You should rather consider investing lump-sums in debt funds.

To conclude, we would like to tell you that monthly SIPs are better than daily SIPs. And daily SIPs might not be worth all the hassle.

There are a number of cons to investing in Mutual Funds through daily SIPs.

• The first is that there will be just too many entries in your Mutual Fund account statement. This will make it very difficult to track your investments.
• Another thing is that you might end up investing much lesser through daily SIPs if you are not careful about the amount that you want to invest. Monthly SIPs are the best because you can plan your monthly SIP based on your monthly income and inflows. It will help you invest at price points that are different enough to provide you with diversification.

You know that you need to decide on the SIP frequency based on the fund type as well as the volatility of the fund. But, is there anything else you need to keep in mind? Yes. You need to choose the SIP frequency based on how much cash you have in hand for investing. You need to be sure that you can invest that much every month or every quarter. With daily SIPs starting at Rs. 100, you might be tempted to choose them. But, do keep the points that we have mentioned in mind. And irrespective of the market condition, don’t stop your SIPs. Always link your SIPs to your goals. This will ensure that you have the best returns in the long run. Choose wisely to get the maximum returns from your SIP.