If you are a seasoned investor in equity oriented mutual funds, you must have experienced effectiveness of Systematic Investment Plans (SIPs). As you might be aware, equity as an asset class is volatile and thus investing all your savings at one go is a risk since value of your investments would reduce with every fall in the market. Many of you might be wondering if SIPs is an effective way of investing in case of equity then would it be equally beneficial to invest in debt funds through SIP route. Before we assess if opting for SIPs is ideal for investing in debt funds, we must consider factors that affect debt markets and debt funds.

What affects debt markets?
Value of bonds goes down when interest rates rise and vice versa. Therefore, if someone keeps buying in a piecemeal manner when interest rates are rising; would gain when rates start falling. But it is rare to see interest rates in the economy going up or down in a straight line. Monetary policy considers variables such as economic growth, budgetary deficits, liquidity position, inflation and currency stability before taking a call on policy rates. Whenever policy rates are hiked, usually borrowing cost goes up. Demand for papers that are already circulated goes down with rising interest rates as investors want to lock money at higher rates.

Are debt markets volatile?
Under normal circumstance, debt is less volatile than the equity thus it is considered a little less risky in comparison. But of late debt markets too have been extremely volatile. The yield on 10 year-G sec benchmark bond has experienced volatility in the range of about 200bps (2%) since May 2013. Value of rupee depreciated sharply over last 6 months. RBI had artificially kept short term borrowing rates for banks high to curb speculations in the currency market happening on account of easy liquidity. It also put restrictions on borrowing by banks under Liquidity Adjustment Facility (LAF) window. This caused liquidity crunch-like situation in the system. Such developments lead to excess volatility. Furthermore, RBI has been hiking policy rates since September this year. Higher retail inflation and likely chances of government overshooting the fiscal deficit limit may affect decision making of RBI.

PersonalFN is of the view that debt markets are prone to increased volatility due to stressed economic conditions. However, investing in debt funds through SIPs may not be a good idea always. PersonalFN believes primary consideration for investing in debt funds is time horizon one has. For those who want to park money only for short term, say for less than 6 months, SIPs may not provide any benefit. Moreover, even those who have a little longer time horizon of about 1 year may also not get any advantage. Remember, exiting a debt fund may attract an exit load and gains, if realised before the completion of 1 year, would be treated as short term gains. In this context, short term gains are added to your income and are subject to tax at an applicable rate. Having said this PersonalFN believes that, those who have a longer time horizon of around 2-3 years may take advantage of volatility in debt markets and invest through SIP route. PersonalFN also believes one shouldn't hold more than 20% of one's debt portfolio in long term debt funds. Those who still want to take higher exposure to long term debt funds would be better off investing in dynamic bond funds as they can invest across maturities.

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