SIP investments, also known as systematic investment plans, have become increasingly popular over the recent years because of the convenience they have brought along with them. Customers need not worry about the market fluctuations or find time to invest regularly.
An SIP investment puts an end to all these time-consuming tasks. It offers its customers a regular way of investments in equity. Gone are the days when people used to wonder what is SIP and needed to find time and interest in capturing market mood and conditions and invest in schemes accordingly. Regular SIP investments will average your investments and provide maximum returns. With investments over long periods of time, the returns start compounding, which is the most signification benefit noticed by experts.
Investors nowadays usually opt for the two most common types of SIPs, namely daily or monthly SIPs. As the name suggests, it offers two ways of investing money.
Monthly SIP – allows a fixed amount of investment on a monthly basis
Daily SIP – popular with businessmen and other professions that earn daily profits, it allows investors to invest a fixed sum, as low as $300, on a daily basis.
For someone who earns a daily cash flow, financial discipline is very important. Daily SIPs help them to build a large sum over a period of time, by investing minimum amounts daily. However, it is also important to know the implications of each method of investment before making the decision. Below are some key features of daily SIPs:
- For funds that are highly volatile and fluctuate frequently, daily SIP investments help in easily identifying low NAV days and invest accordingly.
- A separate account with an automatic deduction option is advisable for convenience of transactions. Failure to invest one day leads to an adjusting of returns.
- Similar to monthly and quarterly SIPs, dividends are paid out to the investors once the mutual fund company makes profit.
With so many investment options, one will wonder if the daily SIP investments are really worth all the hassles. There may not be a considerable increase in monetary profits if compared with monthly SIPs, however daily SIPs do have their share of benefits. Below are some of the advantages of daily SIP investments:
- In a highly volatile market, the daily SIP investments help in averaging out the costs in the long term.
- When the investment amount is pre-decided, daily SIPs, help in its proper distribution at regular intervals.
- Daily SIPs minimize the volatility of the market. Higher the market trend, better the returns. The investors can reap benefits of the bullish market trend, which can be missed out by a monthly investment plan.
- Daily SIPs investors do not need to worry about market trends and conditions.
- Unlike a growth fund, there is no penalty to SIP investors if withdrawals are made early, after investing for a certain period of time.
- For investors who are not required to retain large amount of savings, daily SIP is a convenient option. Fixed amount at a fixed time makes one disciplined and consistent investor.
- As daily SIPs make it easier to capture market high and low trends, it is easier to buy large number of units during market lows.
As the popular saying goes “always consider both sides of the coin.” On similar note, here is word of caution for daily SIP investors:
- Every mutual fund charges a specific percentage of the invested amount as an “entry load.” Investors are requested to check the percentage before investing.
- Always check for transactional charges for every investment.
- Investors need to be aware that the mutual funds company pay out dividends after deducting the distribution tax.
- Daily SIP investors are required to monitor and maintain a record of large number of transactions over a period of time.
- The returns from a monthly SIP plan may not be very different from a daily SIP plan. It is observed that over a period of time, the returns will average out. Hence over diversification of your investment through daily SIPs, may not always be the best plan.
Fund management plays a crucial role in effectively managing SIP investments. It can help in minimizing the losses and capitalizing gains. Fund managers should be able to actively capture market conditions and get the best price on a mutual fund. It is recommended that investors read reviews of various fund houses and managers prior to investing.
For returns to accumulate, you need to be consistent in investments. You need to be patient and give the time it needs. SIPs are best designed to adjust to market volatility and provide maximum benefits to its investors over a shorter time frame. However as an investor, one needs to also watch out for these SIP features:
- Daily SIP investments compel investors to invest regularly and increase their saving potential as well as build substantial corpus.
- The biggest USP of an SIP is the rule of compounding which maximizes returns.
- Higher the investments, higher the returns. And for this reason, you need to start investing in an SIP as early as possible in life. The earning and investment potential is higher at a young age.
A simple way to calculate your returns is through an IRR or a CAGR computing method. While CAGR, compound annual growth rate, calculates your returns using start and end values over a period of time, IRR method, also known as internal rate of return, is able to calculate it more accurately with multiple cash flows. CAGR computation is simple and beneficial for a fixed time frame. However, the IRR method is recommended for multiple cash flows and complicated investments. Use SIP investment calculator to get an estimate of your returns and investments.
The bottom line? Investing in SIPs regularly is the best way to maximize your returns and reduce the effects of market volatility. Mutual funds companies have now tailor made SIP investments into daily, monthly, weekly and quarterly SIPs to suit consumer needs and convenience. Hence consumers are required to understand all the pros and cons and decide the best SIP plan and frequency. As rightly quoted by Warren Buffet “it is the investments and not the savings, that makes a person rich.”