Same SIPs, Better returns! (It's not just about direct funds)

There is increasing awareness about financial products available in the market. Fuelled by the 'Mutual Fund Sahi Hai' campaign, SIP flows have drastically increased. A positive sign is also that they have been relatively resilient even in tough times for the equity markets. Being a Mutual Fund investor myself, I was curious if there are ways of increasing returns.

As I have found out, we can increase equity returns through a few simple tricks. This can cumulatively increase your return from 1-2%

How does a 1-2% return matter?

This is a big difference if compounded over a long period of time. To illustrate this point, let us take the following example: An SIP investment of ?15000/month grows to ?5.3 Crores if the return is 12% over a 30 year period. The same investment grows to ? 6.6 Cr at 13% and 8.3 Crores at 14%.

Tricks to increase SIP Returns:

• Invest in direct mutual funds through SIPs if you are knowledgeable enough to choose the funds. This holds especially true in case of debt mutual funds where the alpha generated by fund managers is relatively minimal. The difference between the returns generated through regular and direct funds is roughly 0.5%- 1%. This trick is relatively known to investors.
• Invest on 25th/28th of the month. This trick is the main subject of this article.

Empirical evidence

Let us try to find out the best date for SIP investing with the help of some data. I have based my observations on analysis of data from FY'00 to FY'19. To observe if there are changing trends in the recent years, I have analysed 4 time periods- 20 years, 10 years, 5 years and 3 years.

The percentages shown reflect the average % daily change in the closing value of Nifty over the given time span, on the given date.

The logic flows, that to achieve a better return, markets must rise after the date of investing.

MF houses usually allow only the following dates for SIP investment: 1,5,7,10,15,20,25,28,30

Based on the data analysed, 25th and 28th seem the best dates for investing in SIPs. However, this data didn't seem very conclusive to me. So I conducted a test of my hypothesis.

I backtested my hypothesis on a few of the major funds. Turns out this hypothesis does hold true. The differential in returns between the starting dates of the month (1,5,7,10) and the ending dates (25,28) of the month ranged between 0.2% to 1% over the past 10 years in my sample set.

But this data is based on Nifty. Does it hold true for small-caps and midcaps too?

I have analyzed Nifty smallcap and midcap data as well in the past in a similar manner. I again backtested the hypothesis on a basket of midcap and small-cap funds. The hypothesis does hold true even there.

What is the rationale behind this?

25th and 28th fall near the F&O monthly expiry which is on the last Thursday of the month. Historically, these are the times when markets are lowest due to positional trading. Therefore this gives a good time to enter the market.

Why do financial advisors usually recommend having the SIP date near the date of salary

Having SIP date as close to salary helps in improving fiscal discipline since money is transferred to SIP as soon as the salary comes. It doesn't leave room for a lot of discretionary spending. Also, the earnings of advisors are linked to your investments. So they want you to invest without missing. However, if you are disciplined, you should opt for 25th/28th as the date for SIP investing.

Experts say that we shouldn't try to time the market. Then why time the date of SIP investing.

SIPs, in general, are meant to beat the market volatility. You invest at regular intervals in SIPs. That is by no means timing the market. By selecting a proper date, we are just taking advantage of the market fall during expiry.

Conclusions

• Invest in Direct SIPs if you have the capability of selecting the right fund.
• Invest on 25th/28th of the month to increase SIP returns.

Note: These observations hold true only for Equity Mutual Funds. They don't hold true for debt markets.

I hope this article helps investors earn better returns. If anyone has other ways of maximizing returns, do mention in the comments. If there are any doubts, you can ask me in the comments.