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How does a daily SIP work?

June 22, 2009 09:23 IST

How do you avoid or minimise the effects of an extremely volatile stock market? Given the choice between the asset classes, and the yo-yoing of almost every fund, do you dare to invest in it at all? What if there was a middle path?

The Systematic Investment Plan is ideal for investors who have a regular flow of money (such as employees). A simple instruction to the fund house and the bank will help them invest regularly at a given time and stay away from the volatility of the stock market.

When you invest a fixed amount, such as Rs 5,000 a month, you buy fewer units when the share prices are high and more units when the share prices are low.

The reinvention of the Systematic Investment Plan (SIP) has been a boon for investors with a low-risk appetite. Rupee cost averaging and compounding are added advantages. But what exactly is a Daily SIP? And how does it benefit you, the customer?

So what is Daily SIP?

Simply, a Daily SIP collects a small sum from an individual on a daily basis and invests it in the market. It operates like any mutual fund, where the disbursement and handling of the money is the fund manager's prerogative.

Rupee cost averaging occurs when the market goes down, and more units of the scheme can be purchased because of a lower net asset value. However, most companies have SIP schemes that allow you to invest on different dates of the month.

Daily SIPs are expected to minimise risk and generate greater risk-adjusted returns while increasing participation.

Daily SIPs: Advantages

Affordability, volatility and convenience are the most obvious advantages of investing in a Daily SIP.

  • With a Daily SIP, your investment is staggered. Instead of a lump-sum amount, you invest a pre-specified amount in a scheme at pre-specified intervals at the then prevailing NAV (Net Asset Value).
  • Consistent monetary contributions average out the crests and troughs of any market, in the long term.
  • It also captures the daily levels of market volatility. In case of a monthly SIP, you still can lose out if the markets are up on the chosen day of the month. The daily SIP, however, eliminates this flaw and lets you benefit out of equity market volatility.
  • If you're looking at a lump-sum investment, then going in for a daily SIP would allow you to take advantage of the market volatility, by splitting the lump sum amount in to daily instalments over a relatively short time frame.
  • The Daily SIP is ideal for small time savers, since the threshold investment level is low.
  • Once you start with a Daily SIP, you invest at the appointed time and that makes you a disciplined investor.
  • With Daily SIPs, you capitalise on the periodic dips in the market and accumulate a greater number of units at lower levels -- and over time, reduce your average unit cost.
  • You avoid the lure and trap of trying to predict the market.

A word of caution

Usually, a fund charges 2.25 per cent of invested amount as the 'entry load'. However, in some cases this amount may get reduced. You should also keep in mind the contribution after taking into account the cash flows available.

Check if there are any incremental transaction charges attached to each investment. Especially in the case of auto-debit, there may be a fee for every transaction.

You need to remain invested in a Daily SIP for at least 3 years to reap the benefits, and monitoring this on a daily basis can be annoying.

If you should fail to pay the SIP amount on any particular working day, your investment will not default but your return will be adjusted against the failure of payment for that day.

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