Every day we get numerous queries of multiple natures pertaining to mutual funds in Advisorkhoj.com. Queries range from questions regarding mutual fund schemes, asset allocation, lump sum or Systematic Investment Plan, lump sum or Systematic Transfer Plan, so on so forth.

A few weeks back, I got a query from a friend, which we had never got before. This friend, a mutual fund investor for many years, was starting a few SIPs in mutual fund. He called me and said that he had selected the funds for the SIP, but he wanted my advice on SIP dates. I told him to choose any date because it did not matter. According to the Random Walk Hypothesis of Stock Prices, stock prices move at random in the short term and therefore cannot be predicted. In any case, through monthly SIPs in Mutual Funds, investors average out cost of purchase over a long investment horizon.

A few days later, I met this friend in a Navratri function and he brought up the topic of Mutual Fund SIP dates again. He understood the Random Walk Hypothesis, but he told me that, he had heard from someone that, SIP in Mutual Fund with auto debit dates at the end of the month give higher returns in the long term than SIP in Mutual Fund with auto debit dates at the beginning of the month. I was not convinced with this hypothesis because stock prices can rise or fall in any month, but my friend was not ready to let go of the theory. He wondered if there is an advantage of investing near the expiry of the Futures and Options series of the month, because stock prices are usually volatile during F&O expiry. I was still not convinced, but I promised to my friend that I will do a historical data analysis to see if this “SIP date advantage” holds water.

Having completed this analysis, I will share with our readers (including my friend), if there is any advantage in selecting SIP auto debit dates to get higher returns. Before I share the results of my analysis, let me reiterate that there is no theoretical basis of advantage of any particular SIP date or dates because of two reasons that I discussed earlier. Just to recap, Random Walk Hypothesis states that stock prices do not follow any trend in the short term and therefore, there is no systemic advantage in selecting one particular investment date (or dates) versus another in SIP in Mutual Fund. Secondly, even if we assume that, stock prices in certain dates in a month are more volatile than other dates due to some monthly events (e.g. expiry), the volatility (upside or downside) is random and therefore, rupee cost averaging in SIPs in Mutual Fund will ensure that the effects of volatility are averaged out.

Statistics is a funny subject. I once read in a financial blog published in the US, that S&P 500 (the most popular stock market index in the US and perhaps the world) has a good correlation with butter production in Bangladesh. This correlation seems to suggest that, instead of doing complicated equity research, if an investor had good knowledge of butter production in Bangladesh, he or she could have got superior returns in the US stock market. This is an example of a spurious correlation. The relationship between SIP dates and returns is not as bizarre as that between S&P 500 and butter production in Bangladesh. The point I am trying to make is that, statistical results are what they are; for the purpose of investments, we should try to find some logical basis in statistical results, before we believe and act on them.

Let us now discuss the results of the analysis of Mutual Fund SIP dates and investments results. For doing the results, I chose Nifty and not any mutual fund scheme. If I chose a scheme, then there would be the question, why this scheme and not another one. Nifty and Sensex are the two most important benchmark for Indian stock market. I did not choose the Sensex because it comprises of only 30 stocks; Nifty with 50 stocks is more representative of a mutual fund scheme, in terms of number of stocks in the portfolio.

I looked at SIP returns for Rs 10,000 monthly SIP over the last 10 years for different SIP date scenarios (please note that, I wrote SIP date scenarios instead of particular SIP dates, because if the market is closed on the SIP date mentioned in your SIP auto-debit or ECS form, units will be allotted to you based on the NAVs of the next business day). The four date scenarios are:-

SIP date at the beginning of the month – the 1st of the month or the next business day (if the 1st is a holiday)

SIP date at the end of the month – the last business day of the month

SIP date around F&O expiry – the F&O expiry for a particular series takes place on the last Thursday of any month. The date of F&O expiry will change from month to month, but in your SIP auto-debit (ECS) form, you have to select a particular date. For the purpose of this analysis, we have assumed the F&O expiry takes place around 25th of every month (or the next business day, if 25th is a holiday)

Two SIP dates every month – the SIP will be done in two instalments (Rs 5,000 each) every month. One at the beginning of the month and another around 15th (or the next business day, if 15th is a holiday).