Systematic Investment Plans (SIPs) are a hit with retail investors. Why? Well, they do away with the hassles and paperwork involved in other modes of investments.
But besides the above reasons, SIPs are popular for the reduced risk. As investors buy at every price level – high valuations, low valuations; in rising markets, in falling markets; investors are less susceptible to extreme losses.
With the concept of reduced risk really appealing to retail investors, many fund houses have come up with variations of SIP plans by tweaking one or the other features. And one the variation is Daily SIP. While in regular SIPs the investment is made once on a fixed date every month, in daily SIPs investment is done on a daily basis. These plans expect to reduce the volatility further and provide a ‘Rupee Cost Averaging’ effect. But do they work?
One, an analysis of a few funds that offer such daily SIPs shows that the difference in the yield of regular monthly SIPs and in that of daily SIPs is very small over the long term. But in the short term, funds investing in mid-cap and small-cap stocks have delivered better returns through daily SIP plans. Daily SIPs are seen to work better when the markets are very volatile. However, this is not always the case. Even short term market trends usually last for 3-6 months on an average. Thus, unless the underlying markets are showing large movements, daily SIPs would fail to make a material difference.
Two, daily SIPs also demand a lot of attention from the part of the investor with respect to maintaining sufficient account balance on a daily basis for the SIP to go through. In case the investor fails to maintain the account balance for any reason, the bank may penalise with ECS rejection charges which may range between Rs 100 and Rs 300 per rejection.
Three, tracking a daily SIP for taxation has lengthy statements involved. Further, while redeeming investments, it would become very difficult for an investor to judge the exact amount that he would receive as each fresh investment could be subject to a particular lock-in (in case of ELSS) and exit load. However, if we are in a volatile market and you want to invest for a short period, daily SIPs are definitely worth the effort.
(The author is Associate Fund Manager, Bonanza Portfolio Ltd.)
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