Yearly SIPs benefit most if you keep investing for long term

Most mutual fund investors are aware of systematic investment plans or SIPs. These help people save a fixed sum at regular intervals and inculcate financial discipline without getting into the business of timing the market. And most important, it gives the benefit of cost averaging due to staggered purchase of units. This means you get more units when markets are down and less when they are up, averaging out the cost over the long term.

However, how staggered should the investments be? Most funds give weekly, monthly and quarterly SIP options. Some also offer daily SIPs.

Now, we also have the option of a yearly SIP. In this option, launched by Reliance mutual fund , a person will be able to invest once a year on a given date.

Does it make sense go for such a product? And, can an investment done just once a year can be called a systematic investment?

Sandeep Sikka, CEO, Reliance Capital Asset Management, says the product has been launched for people who want to invest for the long term but cannot invest as frequently as a week or a month.

"We have provided investors an additional option and not withdrawn any option. Investors can choose as per their cash flow requirement," he says. He says a yearly SIP over 10-12 years will also provide the benefit of cost averaging. What the investor chooses will depend upon his risk appetite and cash flow.

"We expect big investments under this option. It will cater to the needs of people who get lump sums such as annual bonuses and want to put the money into equities for the long term but generally forget to do it," he adds. The minimum investment under the option is just Rs 500.

But certified financial planners have a different view.

"One objective of SIP is accumulating wealth and earning returns. Investing once a year may require a person to invest a lot of money at one go, which means he may miss the benefit of cost averaging. This can have a negative impact on the portfolio if the market falls. If an investor is willing to invest a lump sum once a year, he must do it via systematic transfer plans or STPs," says Anil Rego, CEO, Right Horizons. STPs usually involve transferring investment from one asset into another over a period.

Vivek Karwa, a certified financial planner, says yearly SIP does not make sense. "In monthly SIP, the person is aware that a certain sum is going to be deducted from his bank account on a particular day and so he ensures that there is money in the account. In yearly SIP, there is a high chance of missing the payment date," he says.

However, Manoj Nagpal, an independent financial adviser, has a different opinion altogether. He says mutual funds are taking a cue from the insurance industry where yearly premium payments are the most popular, besides having the lowest lapse rate.

"Monthly SIP makes more sense than yearly SIP. But the industry feels that monthly SIPs do not continue for long periods. Even when people enrol for a long tenure of, say, five years, they generally stop after two-three years. The same lesson has been learnt by the insurance industry, which also provides monthly, quarterly and yearly payment options. Here too most policies that lapse are monthly payment ones. The number of policies that lapse is the minimum in case of the yearly option. The fund house wants to see if it works in mutual funds too, but what is beneficial for investors is the monthly SIP."

If an investor has a lump sum, he can take the weekly or daily SIP route to systematically invest in equity funds.

WHICH SIP GIVES BETTER RETURNS-DAILY, WEEKLY, MONTHLY OR QUARTERLY?

Is it true that the more staggered the SIP is, the more returns you earn? Theoretically, the answer is yes, as more regular investing helps you catch market volatility better as you invest during highs as well as lows. This results in better averaging. In case of SIPs with a big gap between investments, if the market is up on investment date, you will lose out. In contrast, in daily SIP, there is no need to time the market as you invest on all days the market is open.

As far as returns are concerned, if you are investing for a longer period of, say 10-15 years, the frequency will not result in any substantial difference in returns, whether you choose daily, weekly, monthly or quarterly SIP.

In our research '10-year Sensex Returns' we studied daily, weekly, monthly and quarterly SIPs in the BSE Sensex for 10 years. The difference in returns was just one to two percentage points. Daily SIP has given slightly higher returns in all time periods, though the difference is not substantial.

ALIGN SIP TO CASH FLOW

The frequency of SIP should depend on your cash flow. Most salaried employees get their salary every month. It is convenient for them to give an ECS mandate to their bank so that the money is deducted from their accounts on a particular date of every month. Generally, people prefer first week of the month. As the sum is deducted at the start of the month, this enables them to plan their expenses accordingly. If they do it daily or weekly, they will have to make sure there is enough money in the account throughout the month.

"The purpose of SIP is to average out the cost of investment. So, theoretically, daily SIP serves the purpose best. But daily SIP is not recommended because of many factors. First, convenience is an issue. Banks may not accept standing instructions for daily transfer from your account. Second, there is the risk of missing the payment. Third, and most important, calculating capital gains tax will be cumbersome. Quarterly SIPs in equity funds don't give the desired results as they fail to capture market movements. It is best to stick to monthly SIP for all practical purposes," says Rahul Shah, vice president, Equity Advisory Group, Motilal Oswal Securities.

"A daily SIP will result in 20-30 entries in your mutual fund and bank statements every month. It will be a nightmare. We don't recommend that. The periodicity that we recommend is monthly or weekly," says Srikanth Meenakshi, the founder-director of Chennai-based Wealth India Financial Services.

RISK APPETITE

Apart from cash flow, the individual's risk appetite will also determine the frequency of investment. The less frequent the SIP, the more risk you are taking by timing the market. So, the frequency of investment will depend upon your risktaking capability.

Most experts recommend monthly SIP as it gives the benefit of rupee cost averaging as well as the convenience of managing the cash flow. Even if you have a lump sum, you can invest through systematic transfer plans offered by mutual funds.