Are Daily SIPs Worth It? Key Considerations To Keep In Mind

In recent years, the whisper of SIPs (Systematic Investment Plans) and their ‘magic of compounding’ has reached every category of investors both the young and seasoned. SIPs offer a disciplined and manageable way to invest in mutual funds which fits in the investment block of many retail investors.

Traditionally, investors have preferred monthly SIPs as they match their income cycles. However, with investment options becoming more investor-friendly, a new variant - Daily SIP has come into the picture. It is seen as a viable option for various demographic segments such as low-income earners, freelancers, young investors, etc. But are Daily SIPs worth it in terms of long-term returns, cost-effectiveness, and investment discipline?

LIC Mutual Fund recently launched a Rs 100 daily SIP following Sebi’s push to introduce pocket or micro SIPs. The minimum daily SIP amount for LIC MFs has been reduced from Rs 300 to Rs 100 while the minimum monthly SIP amount, has been lowered from Rs 1,000, is being to Rs 200.

On The Bright Side

Some experts believe that daily SIPs help investors take advantage of market fluctuations by investing at various price points. It gives investors the benefit of a potential finer rupee cost averaging. By investing daily, investors could put their money into units when prices dip and fewer when they peak which can average out investment costs over time.

Therefore, theoretically, this would smooth out the impact of daily volatility, a potential advantage for those looking to counter the uncertainties of fluctuating markets.

But while this daily averaging might seem like a better path for steady returns, it is worth considering how impactful it is for long-term investments - which is what SIPs are primarily about.

How Do Different SIP Frequencies Perform?

According to a report by Geojit Insights which analysed compounded annual growth rates (CAGR) across different SIP frequencies i.e. Daily, Weekly, and Monthly, the final value of returns for investment over 20 years varied ‘slightly’. As per the data, the SIP investment of roughly Rs 24.8 lakhs over 20 years generated the following percentage of CAGR across various frequencies as of July 2024:

- Daily SIP: 14.26%

- Weekly SIP (Monday-Friday): Ranges from 14.27% to 14.35%

- Monthly SIP (Start and End of the Month): 14.26% to 14.23%

If one goes by the data, the difference in returns across the daily, weekly, and monthly frequencies is relatively marginal, with only a slight edge favouring weekly SIPs, especially mid-week. However, monthly SIPs are the most common among investors due to their simplicity and alignment with salary cycles. If investors prioritise convenience and align their investments with their income cycle, monthly SIPs remain a solid choice despite the marginally lower returns.

Then why should one go for daily SIPs?

Says Abhishek Kumar, Sebi RIA, founder and chief investment advisor of SahajMoney, a financial planning services firm, “In our experience, long-term investors prefer investment frequency which would match the frequency of their income. However, there are situations when an investor would like to try out different strategies after daily or weekly SIP but the outcome of such strategy especially in the case of equity could not be known in advance.”

Behavioral Discipline Of Investing Daily

One argument in favour of daily SIPs lies in their ability to encourage consistent saving and disciplined behaviour of investments. For young investors, starting with a daily investment can act as a steady nudge toward cultivating good financial habits. R K Jha, MD and CEO of LIC Mutual Fund AMC highlights that for these investors, daily SIPs can function as a ‘great savings habit builder’, especially for those who may not be confident or experienced in investing.

According to Jha, the commitment to invest daily would be particularly beneficial for young investors, creating a daily link between their actions and long-term financial growth. “For all daily wage earners or the younger generation, Rs 100 daily SIP is a very useful tool,” he states.

By building the investment incrementally, daily SIPs can potentially help investors become more comfortable with larger, long-term commitments to their financial goals.

However, it is important to note that this behavioral discipline can also be counter-productive for investors who may find it difficult to continue daily SIPs due to their schedules, lifestyle, or other unforeseeable situations and exigencies.

Expense Ratio & Cost: How these may affect your returns on a daily SIP?

From a financial standpoint, the expense ratio is a vital factor for SIP investors as it can affect the net returns on investment. It is applied to the total assets of the MF, including those purchased through SIPs. It is deducted from the fund’s net asset value (NAV) on a daily basis.

For instance, in monthly SIPs, fewer transactions typically translate into lower cumulative fees. But would this be a detrimental factor on daily SIP transactions impacting the investors’ investment returns?

Jha states that in the case of daily SIPs, investors only incur a small stamp fee, with the majority of funds being directly allocated to units. Therefore even if the frequency of transactions is higher, the cost remains minimal.

However, potential investors would have to keep in mind the administrative costs, however marginal, associated with daily SIP investments. These may add up over time, particularly for large portfolios.

Who Would Benefit From Daily SIPs?

Individuals, especially those who are in the labour force (constituting over 56 per cent of India’s population) could start a daily SIP with a minimal commitment of Rs 100 per day which would translate to Rs 3,000 monthly. However, this may not be very feasible for the gig workers.

Such a low entry barrier is significant for those who may not be very confident in investing larger amounts. However, LIC MF recently introduced a low monthly SIP limit as well, parked at Rs 200. Low-wage earners or freelancers who cannot make significant investments could consider a pocket monthly SIP as well.