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Which is the best SIP - Monthly or quarterly?

By Kavya Balaji

Systematic investment plans (SIP) are often recommended by financial experts for all those who want to benefit from the vagaries of the market. Srinivas Jain, chief marketing officer, SBI Mutual Fund, says: “SIP averages the cost of acquiring units and mitigates the risks associated with market timing.” Earlier, SIPs were only monthly and quarterly, monthly being the popular one.

But, today, you have weekly and even daily SIPs. What are these? Weekly SIP is where you invest a set amount at the end of every week and in case of daily SIP, you would be investing a fixed amount every business day.

Now the question is, if SIP averages out the cost and you invested more frequently, would you get a better average and also better returns? We find out.

Daily vs Monthly.

In India, equity markets mean Sensex and Nifty. So, we took these two indices to check whether you would get better returns by investing in these indices every trading day. For example, if you had invested in the Sensex every day, for the last three years, your internal rate of return (XIRR) would be a certain per cent. XIRR is a better measure than compounded annual growth rate (CAGR) when comparing different investment avenues because XIRR provides the actual return from the investment while CAGR provides only the average return.

Let’s assume that the period of investment for daily SIPs would be 740 business days, for monthly, it would be 36 months and for quarterly 13 quarters. The total investment amount is taken as `74,000 invested over a period of three years between 25 May 2009 and 25 May 2012. Return means XIRR. Coming back to our research, if you had invested every month in the Sensex for the last three years, you would have got a return of -2.31 per cent, while quarterly investments would have yielded -1.57 per cent.  Let us not conclude anything yet. Let’s look at Nifty. Your daily SIP in Nifty for the same three years would have earned you -1.88 per cent, while a monthly SIP schedule would have given you 0.71 per cent and a quarterly investment would have given you 0.25. So, monthly SIPs seem better than daily SIPs.

But does this apply to mutual funds too? Maybe. This result might be applicable to index funds which are passively managed and represent an index. However, there are other kind of funds such as equity diversified, sectoral, mid and small-cap funds. These funds are actively managed, that is, the fund manager would try to limit losses and maximise gains by buying and selling shares according to the fund’s mandate.  Hence, these funds might have lower volatility than indices and, possibly, better returns (see How They Stack Up). The results that we got for indices cannot be used for these funds. So, we did some research on other kinds of funds.

First, let us look at equity diversified funds.

We took two of the best equity funds in terms of three year returns— Franklin Bluechip and DSP Top 100. If you had invested daily in Franklin Bluechip you would have earned 1.61 per cent returns and if you had invested on a monthly basis, the returns would have been just 1.91 per cent. What about DSP Top 100? Daily SIP in DSP would have got you 0.90 per cent, while monthly SIP returns would have been 1.15 per cent. Looks like returns change from fund to fund. We found out the reason for that.

Volatility would be higher on a daily basis for Franklin and, hence, you would get better rupee cost averaging. But the underlying fact is that the difference in return from monthly and daily SIP is not much. It is hardly 0.5 to 2 percentage points.

Also, in case of funds such as DSP top 100, investing every day results in reduced returns. Jai Adiani, founder, fpguru.com, says: “Diversification is the key to success in investment. Both underdiversification and overdiversification are not good practices. Keeping the same principle in mind, a daily SIP looks like over-diversifcation.” So by investing every day in the market, you are actually doing too much of averaging, leading to lower returns.

Hence, if the volatility of a fund is low when compared to its peers, monthly SIP scores over daily SIP. Not only that, quarterly SIP would be even better. So, the lower the volatility of your fund, more would be the returns from monthly and quarterly SIPs.

A part of this logic is true for debt funds because debt funds hardly change on a day-to-day basis. To prove this, we took two of the best debt funds (in terms of three year returns)—Birla Dynamic Bond Fund and Baroda Pioneer Gilt Fund. Daily SIP in Birla Dynamic bond fund would have given 8.56 per cent while monthly SIPs would have yielded 8.54 per cent. In case of Baroda’s gilt fund, daily SIP return would have been 12.91 per cent, while monthly would have been 12.92 per cent. However, quarterly returns for SBI’s and Baroda’s funds were 8.54 per cent and 13 per cent, respectively—there is hardly any difference between monthly and daily SIPs. Monthly SIPs seem to be the best.

So, the ultimate conclusion is that monthly SIPs rule and daily SIPs are not worth the hassle. There are, in fact, several disadvantages to daily SIPs. There would be too many entries in your account statement and it would be difficult to track them. So, stick to monthly or quarterly SIPs.

Srikanth Meenakshi, founder, Wealth India Financial Services, says: “The monthly SIP is the best choice. For one, it matches the periodicity of inflow (in the form of income) and, for another, it provides a sufficiently good (frequency) sampling of the market prices from a probabilistic perspective.” Apart from the fund type and volatility, is there anything else you should note before choosing a daily or monthly or quarterly SIP?

Says Jimmy A. Patel, chief executive officer, Quantum Asset Management: “Choosing an SIP depends on how much cash is in hand for investing.” You should know whether you will be able to commit the fixed amount every day or month or quarter. Fund houses like Quantum offer daily SIPs of as low as `100. Be it a good or a bad market condition, stick to your SIP, this will help you make the best returns over the long-term. So, choose the schemes wisely and sit back to reap the benefits. r
kavya.balaji@outlookmoney.com

IN BRIEF

If the volatility of a fund is lower than its peers, monthly SIP scores over daily SIP. So the lower the volatility of your fund, more would the returns be.

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