Is Daily SIP in Mutual Funds a better option than Monthly SIP?

In the days when agents have abandoned Mutual Funds, they are coming up with innovative concepts to attract investors. The latest one being “Daily SIP”. Until a few days back it was Bharti AXA Mutual Fund which offered this but now IDFC too has joined the bandwagon since 1st February 2010.

As I already have Monthly SIP in IDFC Premier Equity, I was wondering if switching to daily SIP made more sense. I published an article about Daily SIP a few days back. Click here to read it. I was convinced that Daily SIP can be complicated operationally in terms of tracking the investment, looking at the statements, calculating capital gain taxes, etc.

The other thing was affordability. We need to think can a common investor afford Daily SIP?

If we take the case of Bharti Mutual Fund, the minimum amount required to invest on daily basis is Rs 300. We can safely assume that we would have on an average of 20 trading days per month. So it totals to Rs. 6,000 investment per month in a single Mutual Fund Scheme. I really doubt how many investors do that kind of monthly SIP in a fund. At least I don’t know many.

Here is the table showing number of trading days in each month from 1999 to 2009

Convenience?

Again I was going through the Application form for Daily SIP of Bharti AXA Mutual Fund. This is what I found there - Daily SIP facility is currently available only with following banks: HDFC Bank, IDBI Bank, Kotak Mahindra Bank, IndusInd Bank, Bank of Baroda for all locations. For Mumbai, Delhi, Kolkatta, Chennai Daily SIP shall be accepted in all Banks. So if you are not form metros & don’t have account in above mentioned banks you cannot do Daily SIP. So it automatically leaves out a lot of people ineligible for Daily SIP.

Returns?

Now that I was convinced that Daily SIP is not great in terms of Convenience and that I could hardly afford it, I still could think of investing through it if its’ returns exceed our regular Monthly SIP.

So next I wanted to find out how much more returns I could expect if I would go for Daily SIP?

For this I analyzed NIFTY for last 11 years from January 1999 to December 2009. I took the closing value of NIFTY for each day and assumed that I could buy 1 unit of NIFTY by paying amount equal to its value, for e.g. As on 31st December 2009 the value of NIFTY was 5201.05, so I assumed that I could buy 1 unit of NIFTY by paying Rs. 5201.05.

My second assumption was I would invest Rs. 500 in daily SIP starting from 1st January 1999 to 31st December 2009.and Rs. 10000 as monthly SIP on 1st of each month during the same period. Then I would see what’s the value of my investments in both cases as on 31st December 2009.

Which mode of Investment performed better?

I don’t know whats your guess but I always thought daily SIP would perform better. But to my surprise it was the monthly SIP which gave slightly better returns. Monthly SIP gave a return of 200% while Daily SIP gave a return of 199%, there by beating Monthly SIP by 1% points over 11 years. This actually is insignificant. So for all practical purpose you don’t gain anything extra by doing Daily SIP.

But this was 11 year window, how does Daily SIP does if we look every year individually?

I thought of checking how if daily SIP outperforms Monthly SIP in a one year time frame, i.e. you start investing from beginning of every year & see the value on the last trading day of the year. Again here I have taken 1st of every month as my Monthly SIP with an amount of Rs 10,000 & daily SIP of Rs. 500.

So we see that Monthly SIP has beaten Daily SIP in 8 out of 11 years. Also a significant point is the highest out performance of Monthly SIP over Daily SIP is 5.33% while Daily SIP outperform over Monthly SIP is maximum of 2%. So we can safely conclude that Daily SIP has no significant return over Monthly SIP.

To conclude:

Though Daily SIP looks good and affordable concept theoretically but a bit of number crunching and things fall apart. It turns out to be an inconvenient, unaffordable and complex product. Keeping the above points I would recommend investors to stay away from Daily SIP and continue with the good old Monthly SIP.

The only way you can use Daily SIP is if you are someone who earns daily and hence want to invest daily or you want to split and invest lump sum amount in to daily installments over a relatively short time frame.