The term Systematic Investment Plan (SIP) has become very popular in the last decade. People have become aware of the benefits of SIP. An SIP allows an investor to invest a fixed amount at regular intervals. This helps build the discipline for regular savings and also reduces the risk of market timing.
Earlier, monthly SIPs were associated with long-term investing, especially in equity mutual funds. But with the investor’s preferences and the availability of flexible investment options, daily SIPs have become popular. Investors can now invest a small amount every trading day.
But can daily SIPs be effective for short-term mutual fund investments? Let’s try to find the answer to this question through this article.
What is a daily SIP?
A daily SIP is a variation of the traditional SIP where investments are made every day instead of monthly or weekly. An investor can invest a fixed amount daily, and units are allocated as per the daily NAV (Net Asset Value). Through this method, investments happen more frequently, which helps to achieve more price averaging than weekly or monthly.
The point of daily SIP is to get a better look at how the market is moving and take advantage of cost averaging more often. People often think of this method as a way to mitigate volatility, especially in changing markets.
You can also use a daily SIP calculator to plan investments more effectively based on expected returns and time horizon.
Can daily SIP work for short-term investments?
There are many factors that impact the effectiveness of daily SIPs in short-term mutual funds. Short-term investing is less focused on compounding and more on the entry price, market timing, and return stability.
- Role of market volatility
The daily SIP works better in volatile markets where you can capture multiple price points, resulting in improved cost averaging. For example, if markets move up and down sharply over a few weeks, a daily SIP can help average out the purchase cost more efficiently than a monthly SIP.
But if markets are trending upward, a daily SIP may result in a slightly higher average cost than a lump-sum or early investment.
- Impact of fund type
The fund type also plays a major role in determining whether daily SIP is effective. In equity and hybrid funds, price fluctuations are frequent. Hence, daily SIP can provide a better average price. On the contrary, debt funds and liquid mutual funds typically have stable and predictable NAV movements. In such cases, the advantage of daily averaging becomes negligible.
- Returns and cost averaging
Though SIP done daily may result in cost averaging mathematically, this is not always the case. The average purchase price difference between daily and monthly SIPs is usually low, and as for returns, they are largely the same, especially in stable market conditions.
- Investment duration
Short-term investments have a duration of a few months to 1-2 years. This reduces the overall impact of SIP frequency. For shorter timeframes, the number of investment cycles is limited, and the market fluctuations may not be significant enough. Due to which the difference between daily and monthly SIP becomes minimal.
But in longer durations, repeated averaging has a compounding effect. Hence, the daily SIP may not justify the additional complexity.
- Tax & exit loads
Short-term investments (under 1 year) can incur additional taxes and exit loads. For example, if you start a daily SIP in January and want to withdraw everything in December, the units bought in February, March, etc., may still attract an Exit Load because they haven’t been held for the required period.
So, while daily SIP can work for the short-term, you need to account for all these factors.
Who should consider daily SIP?
Daily SIP is not equally beneficial for all investments. As per the above discussion, the daily SIP may be suitable for:
- Investors investing in equity or hybrid funds.
- Those who think the market will be volatile in the short term.
- Investors who like to invest regularly and with discipline.
Conclusion
The effectiveness of the daily SIP is dependent on various factors. Many investors prioritise fund selection and risk management over the frequency of the investment. You should choose an investment plan as per your specific needs and financial objectives instead of assuming that higher frequency automatically leads to better returns.
