Systematic Investment Plan (SIP) is a means to invest in mutual funds. It is an investment strategy where an individual invests a specific sum of money in their desired mutual fund schemes at stipulated intervals for a pre-determined period of time. Investing in mutual funds via SIP helps investors to take part in the share market, without actively striving to time the market.
This is because they are benefitted by a concept called rupee cost averaging where you end up buying varying units of the scheme at different market levels. They end up buying more units when the markets are down and vice-versa.
Another benefit of SIP investments is the power of compounding they offer. When you invest for a long period, your returns are further invested to earn returns on them. In short, your money works to make more money. Power of compounding is claimed to be the eighth wonder of the world by several experts. It helps an investor to build a significant corpus over time that helps to achieve long-term financial goals with small, regular contributions.
SIP investments are a popular investment vehicle as they are quite flexible. Apart from offering the different types of SIP to investors, they also provide the flexibility to choose periodicity of the investments. As an investor, you can invest in mutual funds via SIP daily, weekly, monthly, quarterly, semi-annually, annually, etc. according to their convenience. Though the most popular option of investing in mutual funds is a monthly SIP, investors can customise the way they make SIP investments.
So what should you choose – daily SIP or monthly SIP?
An investor who has selected a monthly SIP will purchase mutual fund units on a specific date of each month at different prices. So, when markets are costly, the investor ends up buying lesser units than when the market is cheap. This way, in the long run, the overall cost of purchasing mutual fund units will average out.
On the other hand, daily SIPs average out an investor’s risk through the month and the overall investment period. The daily SIP option works for those individuals who earn daily wages or have a daily cash flow, as daily SIP would help them to invest in a disciplined manner.
Hence, a monthly SIP option could have a higher risk factor as compared to daily SIP investment option. However, one should note that this risk factor enables a higher return from their initial investment. What’s more, though the daily SIP investment option might minimize volatility, it will unnecessarily increase the number of transactions in your investment portfolio which might get quite difficult to manage.
Irrespective of the fact that you invest in SIP using the daily option or the monthly option, you can use an SIP calculator to understand the future value of your investments. Happy investing!