Weekly SIPs give slightly higher returns, but at the cost of added complexity to manage your money
A relative recently told me about weekly systematic investment plans (SIPs). I have been investing for the past 2 years with monthly SIPs. Are there any benefits of moving to weekly SIPs?
One of the main advantages of opting for an SIP is, to be able to reduce the risk of timing the market. By investing a small amount periodically, compared to investing a lump sum at one time, the risk of investing at a wrong time in the market is substantially reduced. When it comes to periodicity, most people choose monthly instalments as it matches the frequency of their income cash flow (salary). Also, it is easier to manage from the standpoint of managing the balance in your bank account, as you would need to worry about the account balance on just one day in a month. If you choose to go with a higher frequency, you would need to be manage your cash flow and account balances carefully to ensure that the SIP investments take place without failure.
So, the only reason to go with, say, a weekly frequency over a monthly frequency is if the former is likely to deliver higher performance over the latter. However, there have been studies done on this topic and the difference in returns between the two options was found to be negligible. For example, for the 5-year period between July 2010 and July 2015 (the period of the study), a monthly SIP in the BSE 100 index returned 13.32% versus 13.33% for weekly SIP—practically the same return.
If you consider a managed fund, UTI Equity, a good fund over this period, returned 20.57% compound annual growth rate (CAGR) over this period versus 20.51% for a weekly frequency—again a very minor variation. These numbers suggest that taking on extra complexity to manage your money by opting for a higher frequency is not very likely to enhance your returns. So, in this case, keeping it simple is actually the best option, and monthly SIP is the simplest way of doing SIP.
I have Rs10 lakh which I will need after 6 months. Can you suggest where to park it for the short-term with the least amount of risk? I don’t want to put it in the bank. Are gilt funds a good option?
A period of 6 months is very short for considering any mutual fund category other than liquid funds or ultra-short-term funds. Gilt funds are among the riskiest debt funds and are not suitable in this situation. A recent analysis shows that over the last 5 years considering all possible 6-month time frames, long-term gilt funds gave negative returns (i.e., gave losses) about 10% of the time. That is definitely a high degree of risk to take for such a short time.
This is not to suggest that liquid funds or ultra short term funds are 100% safe and will never erode your invested money. Just that the probability of that happening are very, very low, and especially so, if you invest in a liquid fund from a large fund house.
I have invested Rs5,000 each in Mirae Asset Emerging Bluechip, Franklin India Smaller Companies, Tata Large Cap, Birla Sun Life Frontline Equity and HDFC Balanced. How is my diversification? I want to continue investing in only two schemes now. Can you suggest which schemes I should continue investing in out of these five?
You are presently investing in an equity-heavy portfolio with 95% in equity holdings and 5% (roughly 25% of the balanced funds, which form 20% of your portfolio) going to debt instruments. In the equity segment, your investments are indeed well-diversified—investing in five different fund houses, with 40% of the 95% going to large-cap funds, 40% in mid-cap funds, and 15% in a diversified portfolio (the equity portion of the balanced fund). The fund choices are pretty good as well.
However, if you’d like to choose only two of these five funds to continue investing in, the two would be the large-cap funds from Birla Sun Life and the balanced fund from HDFC. This combination would give you a portfolio that is not only diversified, but also more balanced, with about 12% of your investments going to debt instruments.
Srikanth Meenakshi is co-founder and COO, FundsIndia.com. Queries and views at firstname.lastname@example.org