Saturday, July 23, 2016

How to space the SIPs?



Systematic Investment Plan (SIP) is a tool to achieve financial goals through long-term investment planning. It is a better alternative, particularly for those who lack market knowledge. SIPs help save a fixed sum at regular intervals and inculcate financial discipline without getting into the business of timing the market.

Some fund houses also call them 'Sleep In Peace', 'Small Is Powerful'...

SIP in mutual funds is based on two most strong fundamentals - rupee cost averaging and power of compounding - thus helping you ride over market volatility and ultimately generate investment returns.

It gives more units when the markets are down and less when they are up. On that score, is it wise to apportion the sum in to smaller chunks and distribute it at various points through the periodic option, instead of at one-go at the beginning? After all, the markets are volatile over the course of a month or a quarter as much as over a year.

How to space the investment? There are weekly, monthly and quarterly payment options. While some fund houses offer 'daily' SIPs, we also have the option of 'yearly' SIPs, at the other end. So, how to opt? Which one provides better returns?

Why avoid yearly option? In the yearly option, a person will be able to invest once a year on a given date. Can a 'yearly' choice be construed an SIP? It is, nevertheless, possible that an annual SIP for over 12-15 years may provide the cost averaging benefit, the option depending on the cash flow and risk appetite.

But in the yearly mode, there is a chance of missing the payment date. We know that payment of annual insurance premium may be popular, also it has the lowest lapse rate and premium cost also works lesser. But the same logic is not applicable for annual SIPs.

Daily SIP might be just overdoing it If I choose a daily SIP for years, given that there are about 250 trading days, the number of entries in my bank account will make monitoring pretty cumbersome and operationally challenging, as most of us are monthly-salaried class. Some studies have shown that the annualized returns from the daily SIPs and monthly SIPs are almost the same.

Quarterly for non-regular income segments: A quarterly SIP option will give a shorter account statement, but the idea of the investible income lying idle for two months is not relished. Getting 'rid' of this money as soon as possible is best way to ensure financial peace.

Monthly SIP as ideal option: In monthly SIP, the investor is aware that a certain sum of money will be deducted from his bank account on a particular day and so he ensures that there is money in the account. If an investor has a lump sum, he can take the weekly or monthly SIP route.

The more staggered the SIP, the better the returns, as more regular investment helps catch market volatility better, as you invest during lows and highs. True, it merits reason. However, for monthly-salaried, it is convenient if the frequency is monthly, as it matches with the monthly cash flow.

Importantly, you should know whether you will be able to commit the fixed amount on the specified date. Choose the scheme wisely and relax to reap benefits.

When you target a longer period, say 12-15 years, the frequency may not really matter, whether you opt daily, weekly, or monthly.

Be it a good or bad market condition, stick to your SIP, this will fetch you the best returns over the long-term.

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