Choosing A SIP Date: Does It Matter?
Market scholars have often arrived at different formulae to indicate that investing in a mutual fund on a particular date of the month would definitely make your returns better. Does it really work that way? DSIJ conducted research of its own to come to a well-defined conclusion
Efficient market hypothesis (EMH) is long dead. According to EMH, stock market returns follow a random walk and hence exploring any irregularities and inconsistencies in the market will not give you above average returns or marketbeating returns consistently. After the first time it was proposed by the French mathematician Louis Bachelier in 1900, there have been many attempts to find market anomalies and profit out of it.
One of the irregularities that researchers have often paid attention to is the ‘calendar effect’, which is based on the fact that returns for each trading day of the week are not statistically equal. There are various studies which tilt both in favour as well as against the calendar effect. Most of them talk about the months or weekdays to see any pattern in the returns. Nonetheless, we are going to see if ‘dates’ (1-31) do offer any such irregularity in returns and if an investor can benefit out of it.
Dates and Returns: The Relationship
To understand if there is any systematic impact of dates on returns, or certain dates that generally give better returns than other dates, we carried out a study of BSE Sensex date-wise daily returns (calculated based on today’s closing price less yesterday’s closing price) since its inception. What we saw is that there clearly are certain dates that generate better returns than other dates and there are some dates that generate negative returns on an average. The graph below shows the average returns generated by the Sensex since its inception.
We can see that dates such as 1st, 2nd, 25th and 31st are the ones when the average daily returns are better than other dates. Similarly, dates such as 11th and 12th are the dates when on an average they have generated negative returns. If we assume that these returns in difference are statistically significant, there could be a material difference in the end value of your monthly investment value. Depending upon your period of investment, the difference could be more than 5 per cent of your cumulative investments. Direct equity investors can devise a strategy and can benefit out of it by exploiting this market anomaly. But can mutual fund investors also take advantage of this market anomaly?
Anomaly and Mutual Fund Investors
Most of the mutual fund houses allow you to choose dates of your systematic investment plan (SIP). Many fund houses even offer you ‘any date’ SIP. Since equity-dedicated mutual funds also invest in equities, their returns should also follow the same pattern as equity. To check this we did the same exercise with large-cap dedicated funds and came to the conclusion that they too follow the same pattern with a slight change. The graph below shows the date-wise return of Aditya Birla Sun Life Frontline Equity Fund-Growth since 2006 and it largely remains the same as we saw for the Sensex.
Most of the equity-dedicated funds should ideally be following their benchmark return patterns. Therefore, it will be wise to choose your systematic investment plan (SIP) dates in a way that helps you to take advantage of this inconsistency. Going one step ahead we tried to find if returns change with change in investment horizon and if this inconsistency is present across the category or limited to only highly liquid and traded large-cap funds. Therefore, we picked a sample of equity funds from each category (large-cap, small-cap and mid-cap) to verify our hypothesis.
How to study graph
We first took funds from each category that has a history of more than 20 years to implement our hypothesis. The SIP amount we selected was Rs 5,000. We took five different dates of SIP, i.e. 2nd, 9th, 12th, 13th and 25th for investments. Dates are selected based on accommodating both, the dates that have historically generated better returns and those which have generated negative returns. We took four different periods to verify our assumptions as a smaller period of study might not have reflected any anomaly. Hence, we assumed that an investor is investing for three, five, 10 and 15 years. The study was taken for the period ending October 22, 2020.
There are four concentric circles. First circle denotes basic of investment that is term and amount invested. Second, third and fourth circle shows the results of investment in large-cap, mid-cap and small-cap dedicated funds.
You will have to start reading from SIP date and move towards right. So if you have selected 25th as your investment date and invested Rs 5000 every month for three years in large-cap dedicated fund, your average acquisition cost works out to be Rs 213.17, total units acquired will be 844.37 units, end value of your investment would be Rs 189486.2 and XIRR would be 3.373 per cent.
Not a Big Difference
The diagram clearly shows that those who opted for the 25th as date of their SIPs have got better returns on their investment. But it is like milking the last drop of your investments and may not make a material difference to the end value.
The end of the month investment work slightly better may be due to the expiry of derivative on the last Thursday of each month, which might create some opportunity. Otherwise there is no reason why investment on the 25th should make you richer.
The difference in returns is not substantial even for a period extending to 15 years. Therefore, you should look at other factors important enough to make such monthly investments. Thus, if your salary is deposited in the first week of the month, you can choose a SIP date around that so that once your investment is done, you can focus on other things such as household expenses, etc. If the SIP date is towards the end of the month, you will have to ensure that there is sufficient balance in your account on that date. Hence, go with your convenience to choose SIP dates.