Let's understand if it is advisable to invest in an index fund via daily SIPs
Gone are the days when we had only monthly SIPs. Many fund houses today allow weekly as well as daily SIPs. Investors often write to us asking whether they should opt for a daily or a weekly SIP instead of a monthly SIP. We have received a similar query in one of our latest mail where the subscriber is planning to invest in an index fund and asking if he should opt for the daily SIP.
The reason we recommend investing through SIPs is that they average your cost of purchase by spreading your investment over a period of time. That is why, monthly frequency should be enough and daily SIPs are not necessary, doing so would just overcomplicate things. It would have a lot of transactions and a much longer transaction statement to deal with. From a capital gains tax perspective, there would be many more transactions at different NAVs. It also complicates your capital gains tax computation when you redeem these investments. Although they are handled digitally these days, daily SIPs bring no tangible benefit by making more frequent transactions of smaller amounts.
Further, monthly SIPs are more convenient as they fit well with the cash flow cycles of the investors. You earn monthly and you can easily invest that amount monthly. Hence, we suggest you stick to monthly SIPs.
Index funds are a passive way of investing and they just replicate any particular index. For example, an index fund tracking Sensex would invest only in the companies that form the index and exactly in the same proportion. Here the role of the fund manager is very limited as they are simply replicating the index. Whereas in an actively managed fund, the fund manager actively chooses the companies to invest the money in and how much weightage to give to each company.
Unlike an index fund where the main objective is to replicate the performance of the index with the least possible error, the main objective of an actively managed fund is to return more than the index which has been chosen as the benchmark.