An investor in a mutual fund scheme can opt for multiple frequencies of systematic investment plans (SIPs): daily, weekly, fortnightly, monthly and quarterly, bi-annually, and so on.
SIP, as a tool for investing in mutual funds, aid an investor to average out their investment cost and maximise returns. On a regular investment over a specific time, an investor gets more units when the stock market is experiencing a high and vice-versa. This way, it is possible to average out the purchase cost of the mutual fund units.
For instance, suppose an investor is investing Rs 15,000 every month. When the net asset value (NAV) is Rs 15, you will get 1,000 units (15,000 ÷ 15 = 1,000). However, if the market dips and the NAV drops to 12, an investor will get 1,250 units, (Rs 15,000 ÷ 12 = 1,250). As can be seen, an investor has bought more units when the markets are at a lower level.
SIP is the ideal way to invest in equity funds. However, there is no sound basis to exactly pinpoint whether a particular frequency of investment is the most suitable mode.
While monthly is the most preferred frequency, investors are free to choose a mode at their discretion. Going for a daily SIP may offer the benefit of averaging the cost of holdings in an effective manner by participating in the entire market cycle. However, on the downside, an investor would end up struggling to monitor the investment in this case.
When an investor is investing for a longer time horizon, that is 5-10 years, then the frequency of SIP would not have a significant effect on the returns. They continue to remain similar across all frequencies.
The important thought an investor should ideally focus on is to select the right mutual fund for meeting the financial goal based on the risk appetite.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.