DT Personal Finance: What SIP frequency works best, monthly, daily or weekly?

CHENNAI: Most people who invest in mutual funds regularly do it via monthly SIPs. But monthly is not the only frequency option that you have in mutual funds. Most fund houses or AMCs allow you to pick other SIP frequency options as well, like weekly or (even) daily SIP.

What this means is if in monthly option you were planning to do a SIP of Rs 40,000, then instead of once-a-month approach, you can choose to do a Rs 10,000 weekly SIP or Rs 2,000 per day kind of SIP (for 20 market days each month).

While doing a daily/weekly SIP versus plain and simple monthly SIP might seem like a sophisticated strategy to capture more volatilities of the market, does it really help? Is it really necessary? Or just the monthly frequency is good enough for most?

The concept of SIP is straightforward. You invest periodically in equity markets (via equity MFs) so that you can average out your costs. This is what rupee-cost-averaging is all about on which the concept is SIP is built.

But does increasing the frequency of investment help?

Mostly not. When you are investing for the long term via SIP in MFs, then the choice of SIP frequency doesn’t have a major impact on the overall returns.

But if you are mathematically inclined and you do some basic data crunching, you will find among daily/weekly frequencies, one or the other option would be doing better than the monthly one for a given set of data. But, if you do a comprehensive analysis, you will find many times, monthly is the better option. Important thing to understand here is just because it has happened in past, doesn’t mean it will get repeated in the future. Also, different combinations of different MF schemes, SIP tenures and SIP frequency will always throw up different winners.

In my view, it’s not worth worrying too much about which is the best option. If you are investing for the long term (say 10-15+ years), then whether you do a monthly or a daily or weekly SIP does not make much of a difference in returns. A more frequent SIP (daily/weekly) versus monthly one only complicates things unnecessarily and doesn’t add anything to the long-term returns. Given the simplicity and ease of operation (and also managing transaction data at the time sale and at the time of filling taxes each year), it is best to go for monthly frequency for your SIPs.

That is not to say that doing a daily or weekly SIP is wrong. You can do it if you want it. It is just that the number of transactions will increase unnecessarily without too much of a proven benefit.

And if you think taking the approach might help in case of sharp market crashes, then that is correct, but only to an extent. And the reason is you will only be able to benefit for that month’s SIP amount (say Rs 40,000), but the existing portfolio (say of several lakhs) will still experience the same market fall. So, one month’s worth of SIP (whether monthly or weekly or daily) is anyways a negligible portion of the overall accumulated portfolio and hence, won’t matter much.

Instead of worrying about the frequency, it is better to focus on whether you are investing the right amount each month for achieving your financial goals or not. So, if you have Rs 20,000 per month to invest and you are worried whether to do a Rs 5,000 weekly SIP or Rs 1,000 daily SIP or Rs 20,000 monthly SIP, but as per financial planning calculations you need to invest Rs 50,000 per month, then that is where your energy focus should remain.