While daily SIPs may offer better market timing, experts warn that they come with their own challenges, particularly in the area of taxation.
Daily SIPs vs. Monthly SIPs
Abhishek Mishra, Head of Mutual Funds and Insurance at Bonanza, explains that daily SIPs help investors take advantage of market fluctuations by investing at different price levels.
“With daily SIPs, you can benefit from improved rupee cost averaging and avoid the risk of making lump sum investments during market peaks,” he said.
For investors with a daily or weekly cash flow, such as freelancers or business owners, this strategy can ensure disciplined and consistent investments.
However, the increased frequency of investments also increases the complexity of tax calculations.
Each daily SIP is considered a separate transaction for capital gains tax purposes. This means that when an investor redeems his units, he must keep track of the short-term and long-term capital gains from each individual transaction.
Gang notes that “more brackets mean more complex tax calculations.”
In comparison, a monthly payment SIP requires less tax inputswhich makes it easier to manage.
On the other hand, Mohit Gang, CEO of MoneyFront, debunks the myth that more frequent SIPs, such as daily or weekly, offer better returns than monthly ones.
“For over 20 years, a daily SIP on Sensex has delivered a CAGR of 14.26%, and a similar monthly SIP would deliver almost the same result,” says Gang.
For example, if an investor had contributed ₹500 daily for 20 years, the corpus would be ₹1.25 crore, which is almost identical to the returns of a monthly SIP.
“Investors should avoid overcomplicating their investments with daily contributions. It offers no real advantage, but it does increase the complexity,” he adds.
Priti Goel, Founder and CEO of Prisha Wealth Management, a SEBI-registered investment advisor, gives an example.
“Let’s compare ₹10,000 invested through daily SIP on one hand and monthly SIP on the other. In monthly SIP, the total annual investment value will be ₹1.20 lakh, on the other hand, for the same total annual investment value, ₹476.19 is invested per day for (approximately) 252 trading days in a year. Let’s assume an annual rate of return of 12% for both SIPs. In that case, the future value for a monthly SIP becomes ₹1,26,82 whereas with daily SIP, the future value becomes ₹1,27,000,” he says.
A closer look
To understand the tax implications, let’s consider some examples.
It is important to note here that Finance Minister Nirmala Sitharaman recently introduced higher taxes on short-term and long-term capital gains (LTCG) for equity mutual funds
which further affects SIP investors.
He Short-Term Capital Gains Tax (STCG) on Equity Mutual Funds has been increased from 15% to 20%, while LTCG tax has been increased from 10% to 12.5%.
However, the exemption limit for LTCG tax has been raised to ₹1.25 lakh per financial year, up from ₹1 lakh.
Example 1: Daily SIP vs. Monthly SIP in a Bull Market
Daily SIP: Suppose an investor invests ₹500 every business day (20 days in a month).
Over the course of a year, they put in Rs 120,000. When they recover their investment, they have to calculate the capital gains for each of the 240 daily transactions.
If they redeem after less than a year, they would pay 20% STCG on each transaction.
If redeemed after one year, each daily tranche will need to be tracked separately to determine if it qualifies for LTCG, taxed at 12.5%.
Keeping track of all 240 legs can be complicated and time-consuming.
Monthly SIP: Now, let’s assume a similar investor contributes Rs 10,000 once a month. During the same year, he would have invested Rs 120,000, but with only 12 transactions to track.
If the investment is recovered after less than one year, the entire amount would be subject to a 20% STCG.
If redeemed after one year, only 12 transactions will need to be calculated for LTCG at 12.5%.
The tax calculation here is significantly simpler compared to the daily SIP.
Choose between daily and monthly SIPs
When deciding whether daily or monthly SIPs are better, it largely depends on individual financial goals and cash flow.
Monthly SIPs are simple and align well with the income schedules of salaried individuals.
They offer consistency, lower transaction costs and fewer tax implications.
For market enthusiasts or professionals who want to take advantage of market volatility, daily SIPs may seem attractive.
But as Value Research data shows, daily SIPs only offer about 0.59% higher returns over five years than monthly SIPs.
For most retail investors, the increased complexity of daily SIPs may not outweigh the slight difference in returns.
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