First of All, Let Us Understand What an SIP Is.
Systematic Investment Plan is an investment strategy wherein an investor needs to invest the same amount of money in a particular mutual fund at every stipulated time period.
Investing in SIP enables an investor to take part in the stock market, without actively timing them and he/she can benefit by buying more units when the price falls and fewer units when the price rises.
This scheme helps to reduce the average cost per unit of investment through a method called Rupee Cost Averaging.
SIPs help you to average your purchase cost and maximize returns. When you invest regularly over a period irrespective of the market conditions, you would get more units when the market is low and fewer units when the market is high. This averages out the purchase cost of your mutual fund units.
Another benefit provided by systematic investments is the power of compounding. When you invest over a long period and earn returns on the returns earned by your investment, your money would start compounding. This helps you to build a large corpus that help you to achieve your long-term financial goals with regular small investments.
Though the most popular SIP is investing a fixed amount every month, investors can customize the way they put money via SIPs. Many fund houses allow investors to invest monthly, bi-monthly and fortnightly or even Daily, according to their convenience.
This brings us to our current topic of discussion: which of, Daily SIP’s or monthly SIP’s bears better returns.
in our case study, we have chosen 3 widely invested categories of mutual Funds namely Large Cap, Small Cap, and ELSS(Equity-linked savings scheme) Funds.
In our analysis we have chosen our sample funds as Mirae India Equity Fund as our large-cap, Aditya Birla sun life tax returns ’96 as ELSS Fund and Reliance Small Cap Fund as our small-cap Fund.
Before going further let us first learn what are these types of Mutual Funds.
Large-Cap Mutual Fund
Large-cap funds are those funds which invest a larger proportion of their corpus in companies with large market capitalization. These large-cap companies are reputable, credible, prestigious and stable. These are the old and well-established players with a track record. Such companies typically have strong corporate-governance practices and have generated wealth for their investors slowly and steadily over a long term.
Mutual funds that invest a majority of their investible corpus in these companies are labeled as large-cap funds. Being seasoned players, the underlying companies in the portfolio of large-cap funds may be considered as relatively steady compounders and regular dividend payers. On the risk-return spectrum, large-cap funds deliver steady returns with relatively lower risk.
Small-Cap Mutual Fund
Lying at the lowest end of market capitalization, Small-cap mutual Funds are generally viewed under the misconception of being hazardous or ‘quick rich’. However, both of these labels are untrue.
Small cap companies have smaller revenue and client base and usually, include the start-ups or companies in the early stage of development. Small-cap mutual funds are potentially big gainers as they are yet to be discovered within the sector and can show growth potential at a large number once unfurled in the market. However, as these enterprises are small ventures, these should be researched properly.
This is considering that a lot of small companies do not have the financial strength to survive bad times and some of them might be mismanaged businesses run by greedy promoters. Hence, it is essential, especially in the case of small-cap investments that one does a thorough research regarding the fund’s credentials, management strength and track record, and long and short-term growth plans of the fund before investing. Small-cap funds are known to be comparatively risky, but, over a long period of time investment via SIP’s can yield profitable returns.
ELSS Mutual Fund
Equity-linked savings scheme popularly known as ELSS are close-ended, lock-in period of 3 years diversified equity schemes offered by mutual funds in India. They offer tax benefits under the new Section 80C of Income Tax Act 1961.
In our analysis, we have chosen the monthly SIP to be 30,000 INR, therefore, our daily SIP must be 30,000 divided by 31, 30 or 28 (or 29 if it is a leap year) depending on the months.
The time period we have chosen is from 1st January 2013 to 31st December 2017 i.e. a period of 5 years. Our total investment over a period of 6 years is Rupees 1,800,000.
Plotting the returns of Mirae India Equity fund over a period of 5 years:
We notice that the monthly SIP option performs better than the daily SIP option.
Now, we shall show the plots of returns via Monthly SIP’s vs Daily SIP’s for Small-Cap Funds and ELSS Funds.
The plot for Aditya Birla Sun Life Tax Returns ’96 (ELSS)
Returns Pot for Reliance Small Cap Fund is shown below
Therefore the daily SIP’s returns DO NOT outperform the monthly SIP’s returns.
An investor who has opted for a monthly SIP will be buying mutual fund units on a specific date every month at different prices. So, when markets are costly, the investor will get lesser units and when the market is cheap, the investor will get more mutual fund units.
This way, in the long run, the overall cost of buying mutual fund units will average out. On the other hand, daily SIP’s average out the investors’ risk through the month and the total investment period.
Hence, monthly SIP option may have a higher risk factor when compared to daily SIP’s, but this risk factor enables a higher return from our initial investment.
Hence, from our analysis, we can conclude that in case of large-cap, small-cap and ELSS Funds, monthly SIP option provides a better return than the daily SIP option.
Read more about why SIP is a safer option here.
Happy investing 🙂
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.