Mutual Funds Awareness 107: Will a Daily SIP of Rs 100 Create Wealth?
The latest innovation in the field of Systematic Investment Plan is the daily SIP. Almost all mutual fund companies have now modified their entry plan from a minimum of Rs 500 per month to Rs 100 per day. In fact, all these AMCs were happy to accommodate this change, as they believed their influx of capital could increase. Well, it is not that simple.
The real difference is not felt at the AMC’s end but inside the minds of the investors. Investing Rs 100 a day somehow feels much easier than investing Rs 3000 a month, even though both options are likely to yield a similar returns profile.
If you look at the study done by ETMoney, over a 10 year period, the returns profile of both daily SIP and monthly SIP in the Nifty50 index fund is precisely the same. Let us not confuse that a daily SIP has a compounding frequency of 1 day whereas a monthly SIP has a period of 1 month. This is not true. The returns of all major indices are reported annually, i.e., 1 year. Thus, for a daily SIP, you are getting the yearly returns divided by 365, whereas for the monthly one, you are getting the annual returns divided by 12.
If not for the daily compounding myth, why would a daily SIP really work? Let us explore in detail today!
Everyone is really excited to study the investing part, but not the investor’s part. If you Google for “daily sip vs monthly sip”, you get at least 40+ links stuffed with data on how daily SIP works, the returns part, and how the power of compounding works. In fact, all these articles are a cut-and-paste from “monthly SIP” to “daily SIP”. Yes, they just replaced “daily” whenever the “monthly” word came up. End result? Zero useful content.
The reason the research is flawed is that none of them discuss the type of investor who would be attracted to this offering. Maybe they forgot who was attracted to the monthly SIP when it first launched. Let me help you recall.
Decades ago, when mutual funds were launched, SIPs were not the preferred route for entry; lumpsum was. Just like any other asset class, mutual funds were the darling of the wealthy class. When they had surplus funds — they’d mutual fund it.
When SIPs launched, these rich people found it easier to contribute, and they started pouring in more money. But the real breakthrough came from the salaried class. For them, investing in assets became much more practical as they enjoyed a regular salary. Three decades later, we are witnessing employees who are becoming millionaires by investing.
When the daily SIP was launched, it particularly appealed to the regular income class, but little did people think of the daily-wage class. Yes, daily SIP is a breakthrough for the daily wage earners. Not only to create wealth, but also to help them develop financial discipline.
People who earn once a year are the richest, and those who earn daily are the poorest. The reason is psychology. The daily wage earner knows very well that he will be going to work tomorrow and thus will exhaust his entire earnings today. The mindset to save? A big zero. And the person who earns once a year (from dividend or capital gains income) knows very well that they have to survive until the paycheck and hence will learn to save. Once he receives the payment, he will not spend it all, because he knows he might need to save some for the upcoming year as well.
The same is true with food, too. When you have only a limited quantity of rice for the entire month, you reduce your daily intake to survive till the stocks last.
The people who came to work in our fields were daily wage earners; if they showed up for the day, they received payment. If not, zero wages. These are the same people who spend all their income on food, alcohol, or entertainment. If they are unable to find work for 3 to 4 days straight, they might have to borrow to meet their basic expenses.
The only way out of this trap is to learn financial discipline. If you have a daily wage of Rs 1000, learn to invest Rs 100. I am sure, this alone won’t build wealth for you, but you will learn to adjust your expenses to Rs 900.
Over the next 3 to 9 months, this works like a medicine. Perhaps you were only able to save Rs 25000, but the confidence of having a small savings balance will further encourage you to increase your savings. Soon, your daily expenses will decrease from Rs 900 to around Rs 800. This is the real financial discipline that you learn.
This is the true power of daily SIPs. Even if you are not a daily wage earner, you can use this tool to cut down on your unwanted expenses. These days, a tea + snack or a dosa costs Rs 100 or more. No, I am not asking you to cut down on your dosa — but you get the message. You now know where to start. I am seeing the current generation spending much more than they earn to fit in their circle. I still look back on how my parents’ generation managed their savings. They really taught my sister and me to cut down on our unnecessary wants.
Wealth is created by sacrificing your current desires for a greater cause in the future. One does not need to be a miser, but rather be frugal enough. When you choose to save/invest, magic happens. This is not just my opinion, but one shared by all popular economists.
“The essence of saving is a postponement of consumption.”
— Irving Fisher, “The Theory of Interest” (1930).
“The amount of capital employed in a country is the result of the habits of the people; it is the effect of their frugality, not of their industry.”
— David Ricardo, “Principles of Political Economy and Taxation” (1817).
“Higher savings lead to higher investment, which increases productive capacity and promotes economic growth. Without sufficient savings, the economy cannot grow sustainably.” — Harrod-Domar Model (1939).
PS: You can always look up the other 40+ articles on how the daily SIP works, but you must have got an idea of “why” and “whom” it should work on.
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