Should You Consider Starting SIP In Debt Mutual Funds?
Oct 25, 2019

Author: Divya Grover

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Investing in mutual funds through lump sum route can be a risky proposition. This is where systematic investment plan (SIP) comes to the rescue.

SIP is a good way to stagger your investment and is therefore lighter on the wallet. Additionally, it does not require timing the market, which means that even a novice investor can invest through this route.

As you invest regularly in a SIP, it helps to average out the cost of investment. Through the SIP mode, you can buy more units when the markets are low, so when the market bounces back, it results in higher returns. And if market volatility makes you jittery, taking the SIP route would help you mitigate the risk.

[Read: Are SIPs Better Than Lumpsum Investments? Know Here...]

SIP is usually associated with investment in equity mutual funds. However, in the case of debt mutual funds, SIP is largely unheard of.

People with low risk appetite looking for stable investment avenue often park their money in debt funds. Capital appreciation in debt funds is mainly in the form of the interest income earned from debt instruments of various maturities.

However, debt funds, though less volatile as compared to equity funds, are not risk free. These funds are subject to interest rate risk, credit risk, and liquidity risk. Therefore, even investors of debt funds need to exercise caution while investing in them.

So should you consider starting a SIP in debt mutual funds to average out the cost and mitigate risk?

Many funds managers of established fund houses are in favour of starting SIP in debt funds.

In the analysis below, let's see if SIP in debt funds yields higher returns than lump sum investments.

Table: SIP versus Lump sum in debt funds

3 year 5 year
Average category returns SIP (XIRR %) Lump sum (CAGR %) SIP (XIRR %) Lump sum (CAGR %)
Short Duration Fund 5.96 6.54 6.89 7.64
Corporate Bond Fund 3.97 5.15 4.79 6.34
Medium to Long Duration Fund 7.09 6.37 7.43 8.15
Dynamic Bond Fund 7.40 6.94 7.90 8.59
Gilt Fund 9.73 8.11 9.43 9.82
Data as on October 23, 2019
(Source: ACE MF)

SIP returns for both short-term and long-term debt funds are lower than lump sum returns in most cases during 3-year and 5-year period, though the difference is not very significant. SIP returns are lowest as compared to lump sum in corporate bond fund which is a short-term fund.

However, long-term funds like medium to long term fund, dynamic bond fund and gilt fund gave slightly higher returns than lump sum investment in the 3-year period.

As NAVs of debt funds are not prone to high fluctuations, especially in short term funds, there will not be enough opportunities to buy units at very low prices. Rupee cost averaging in debt funds may work only to a minor extent.

If you want to start SIP in debt funds, you may consider it for more volatile debt funds such as medium to long duration fund, dynamic bond fund and gilt fund. Long-term funds are more likely to be affected by interest rate fluctuations and the SIP route can mitigate the risk.

But ensure that you carefully approach debt funds. In the recent past, many funds across maturity profiles had exposure to downgraded and toxic debt papers which subjected investors to undue risk.

[Read: Approach Debt Funds With Your Eyes Wide Open...]

So, prefer the safety of principal over return. Stick to the mutual fund schemes where the fund manager doesn't chase returns by taking higher credit risk. Further, asses your risk appetite and investment time horizon while investing in debt funds.

If you prefer to keep your capital safe, opt for fixed deposits.

PS: If you are serious about investing in rewarding mutual fund schemes, consider PersonalFN's flagship Unbiased Mutual Fund Research service- Fundselect.

It is a credible research service that provides insightful guidance and recommendations on equity funds and debt schemes every month --- the ones to Buy, Hold, or Sell.

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