IDFC Mutual Fund Starts Campaign ‘SIFI’. Should Buy Into the Idea?

Further, the habit of saving and investing regularly (every week, month, quarter) to build the desired corpus for the envisioned financial goal is inculcated. And with the right choice of schemes amongst the various categories and sub-categories, SIPs can help you compound wealth ---work wonders in the long run. When you align SIPs to your envisioned financial goals, the need to borrow money to fulfil the goal possibly is eliminated. For example, instead of an education loan for your children, an adequate corpus can be built to fund their higher studies if the SIP route is taken (by selecting the best mutual fund schemes). SIP can prove to be a rewarding strategy.

Does it make sense to SIP into debt mutual funds?

A SIP in debt mutual funds is largely unheard of.

Nevertheless, IDFC Mutual Fund is taking the road less travelled. The fund house has started a campaign SIFI (SIP in Fixed Income) to promote the concept of SIP for its debt funds investors.

"There is a lack of awareness about debt SIPs. SIFI can help generate better risk-adjusted returns, and your debt fund SIP can help cushion the impact of higher volatility in equity markets, thereby balancing your allocation" -- Mr Vishal Kapoor, CEO, IDFC Mutual Fund in a media briefing.

Can SIFI prove to be as effective as SIP in equity?

At PersonalFN, we have undertaken a comparative study of SIP returns vis-a-vis lump sum returns of debt funds in the past. We found that rupee-cost averaging didn't work efficiently in case of SIPs in debt funds. Lump-sum investments in debt funds have generated better returns as compared to SIP investments across almost all sub-categories, barring a few such as Gilt Funds and Dynamic Bond funds.

[Read: Should You Consider Starting SIP In Debt Mutual Funds?]

​Do note that although debt funds are less risky than equity-oriented funds, they are not risk-free or safe. In reality, debt funds mainly carry three types of risks prominently -interest rate risk, credit risk, and liquidity risk.

Interest rate risk can be managed by choosing the debt scheme paying heed to the interest rate scenario. For example, now when interest rates seem almost bottomed out (after 250 basis points cut in policy rates since February 2019), shorter duration funds---mainly a Liquid Fund and/or Overnight Fund ---would be a prudent choice for the safety of the capital over returns. The longer end of the yield curve could be more sensitive to interest rate risk.

Speaking of the credit risk and liquidity risk, amid the current COVID-19 crisis and grim macroeconomic indicators, managing these risks would be a herculean task. This is because the credit risk has intensified and a few fund houses are displaying apathy for sound risk management while managing the debt portfolio. Many debt funds (irrespective of their maturity profiles) have kept investors on the tenterhooks due to the frequent default episodes.

Side-pockets can dampen the efficacy of SIFI approach further...

Suppose a few companies default on their debt obligation and thus face credit downgrades, NAVs of the debt funds holding these securities will drop to commensurate with the fall in the valuation as per its weightage in the underlying portfolio.

But if a fund house creates side-pockets by carving out troubled assets and allows new purchases and redemptions only from the standard portfolio; SIP investors can't take advantage of the fall in the NAV. On the contrary, their existing investments will still reflect the loss on account of defaults and downgrades. Such practices can make SIFI less effective.

On the backdrop of the above, it is not necessary that SIFI will lower the risk and help to clock better risk-adjusted returns.

For many categories of debt funds, SIFI might be irrelevant

Overnight funds and liquid funds are meant for investors who have a lump sum surplus which they don't intend to utilize immediately. More than capital appreciation, the aim of such categories is safety over returns and liquidity. Thus, SIFI could become irrelevant for such debt fund categories.

In the current context, since the interest rates are near to their historic lows and have almost bottomed out now, SIP in a few other sub-categories, such as gilt funds and long term debt funds, would also not make much sense.

So, do not buy into the idea of SIFI in a jiffy. Only a sensible and astute investment approach will help manage investment risk and pave the path to wealth creation.

Starting a SIP in a debt mutual fund scheme that does not follow sound investment systems and processes won't make any positive difference to the risk you are exposed to. The risk profile of such a debt scheme could still be high. When you select a debt mutual fund scheme for your portfolio, pay attention to other factors such as:

• The portfolio characteristics of the debt schemes

• The average maturity profile

• The corpus & expense ratio of the scheme

• The rolling returns

• The risk ratios

• The interest rate cycle

• The investment processes & systems at the fund house

Our friends at Quantum Mutual Fund have highlighted the secret behind their debt management strategy, which has helped them provide safety and liquidity to investors when it comes to investing in Quantum funds. Don't Worry, Quantum Liquid Fund always aims for Safety and Liquidity.

On the other hand, if you are an ultra-conservative investor, you may avoid debt funds altogether and prefer fixed deposits instead.

Happy Investing!

Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter

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