Is monthly SIP better than a yearly SIP?

A Systematic Investment Plan or SIP as everyone calls it in the mutual fund industry is a tool to invest in mutual fund schemes. If you too were confused thinking that SIP is a mutual fund product, it's time to clear that misconception. A SIP is simply just a medium to invest in a mutual fund and not a mutual fund scheme in itself. It is an investment plan that allows retail investors to invest a small fixed sum at regular intervals in a mutual fund scheme of their choice. The duration of SIP can be determined by the investor.

Mutual fund offers two modes of investment – SIP, and lumpsum. While lumpsum investing requires investors to have a large sum for initial investment, the minimum SIP investment amount is usually low and feasible for investors of all categories and financial backgrounds. Sometimes, investors are not able to determine the duration of the SIP. They find it difficult to comprehend whether it is better to opt for a monthly SIP, quarterly SIP, weekly SIP, or yearly SIP.

This article aims to identify which SIP frequency is better.

Understanding Systematic Investment Plan

As mentioned earlier, a Systematic Investment Plan is an investment plan that aims to inculcate the discipline of regular investing in mutual fund investors by allowing them to invest money periodically in mutual funds. Mutual fund investors usually prefer SIP investing over lumpsum as the former leverages market volatility and averages out the cost of the purchase in the long run. When the markets are volatile and the NAV of the mutual fund scheme, is low investors receive more units. Similarly, when the NAV is high investors receive fewer units. SIPs average out the cost of purchase, thus allowing investors to buy more units over time. This adjustment of unit allotment depending on the fluctuating NAV is referred to as the ‘rupee cost averaging’ technique.

Apart from this, if you continue to systematically invest in mutual funds like equity funds via SIP, you may even benefit from the power of compounding. Power of compounding is something that comes into effect when the invested sum accrues interest and when that interest starts generating interest of its own. With such promising features, SIPs offer mutual fund investors an opportunity to create long term wealth through systematic and regular investing. Once they inculcate the discipline of regular investing, investors may find their investment journey a lot simpler than what they anticipated. The best way to bring financial discipline in oneself is by opting for a Systematic Investment Plan.

What are the different frequencies offered for SIP investors?

Monthly SIP: This is the most common SIP where investors invest a fixed sum or a fixed date of every month.
Weekly SIP: Here, the investor can invest the fixed SIP sum once a week in mutual funds
Daily SIP: An investment approach where mutual fund investors can invest a fixed sum every day
Yearly SIP: An SIP where the mutual fund investor can invest a fixed sum once a year

Which is better – Monthly SIP or Annual SIP?

The answer to this question will depend on the income inflow of the individual and how good a saver he or she is. For example, let us assume you wish to invest Rs. 60,000 for one year in a mutual fund scheme via SIP. If you choose monthly SIP, you just have to invest an amount of Rs. 5000 per month in the mutual fund scheme. However, if you opt for the annual SIP then you will have to invest the entire Rs. 60,000 once a year. This is as good as making a lumpsum investment.

Not everyone may have the resources to invest such a large amount all at once. Now if you are someone who is good at saving regularly and can accumulate a large sum, you can consider the yearly SIP. However, the monthly SIP will lower the burden of accumulating a large investment corpus and it will also void investors from averaging their cost of purchase.

Disclaimer: Past performance may or may not sustain in the future. The above is for illustration purposes only and should not be construed as investment advice or a guarantee of returns.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.