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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