Benefits of Daily SIP

If I received a rupee for every time I’ve been asked by keen retail investors, “Should I buy mutual fund units or do an SIP” I would be a very rich person today. SIPs have become such a big part of the retail investors’ long term wealth creation construct that even the investments by foreign funds have assumed lower than normal importance. As days go by better news flows on past SIPs that have only added to the allure.

Principally, the SIP mode for investing works on the twin facets of a country’s equity markets showing future potential for growth – based on the growing earnings and potential to earn more in the future of companies – and by depressing volatility.

How does SIP depress volatility?

     “The answer is simple. As we put money into buying a basket of equities, the vagaries of the markets make it go up AND down. So in the short term the market movement looks like a roller-coaster but the process of averaging brings the roller-coaster movement to work for our portfolio’s value.”

By buying into the basket regularly, the investment opportunities to buy-in dips, and thus, average down the purchase price.

Everyone is pretty clued in on the potential of the SENSEX making record high levels in the coming years. But let’s talk of the second important aspect of volatility. Volatility brings in a degree of uncertainty to one’s portfolio value. Two decades ago, when the option of investing in the equity markets – and that too in a basket of stocks on a regular basis – came about, there were a lot of people who did not understand how it worked in the investors favour. However in the last decade (especially so after the 2008 equity market crash and its subsequent resurrection) there are a lot of shared experiences on the efficacy of SIPs in lowering volatility and providing a more predictable growth.

But as every product or solution goes through the process of evolution, so does the SIP. Earlier, it used to be monthly (mostly this) and quarterly (a small portion). But in today’s high market levels where the chances of the markets making some corrections before it assumes its’ anticipated upwards movement, the new mantra is the DAILY SIP.

Averaging about 22 working days a month, an investor looking to invest about Rs.6500 per month can stagger this over the number of working days available in the month. The exercise is intuitively profitable as it takes entry into every market level but is even more so when the markets show a lot of sideways movements and in higher levels in the indices.

An overwhelming majority of SIP investors have entered the market recently. For these relatively new investors and the huge numbers who are yet to take the SIP plunge, the familiarization, and more importantly, the way forward in providing higher predictability is by way of daily SIPs. Granted, the chances of a daily SIP mechanics has a lower chance of beating large SIPs done monthly, if the last three years are taken but if the idea is to be a reasonably long term investor then the higher chances of beating the market and the competition is definitely lying with the daily SIP-ers.

The experience of the last decade has spawned a spate of new thinking that provides a higher push to the low volatility line of thinking.

“This has proven that, given time, the low volatility system, defined by daily SIP, generates more returns over the familiar monthly system of SIP.”