Should you invest in debt funds through a systematic investment plan (SIP)?
Mutual fund SIP (systematic investment plan) was introduced in India nearly 3 decades back and since then, SIP investing has come a long way. According to AMFI, the total SIP accounts currently are at Rs 6.12 crore. Also, note that the total amount collected through SIP mutual funds has increased to Rs 13,573 crore as of December 2022 from Rs 3,973 crore as of December 2016, which is nearly 3.4 times the rise in a span of 6 years.
The SIP contribution here is not just through equity mutual funds but also from other mutual fund types like debt mutual funds and hybrid funds. Despite this, many investors associate SIP with equity investments only. Discussed here are reasonswhy SIP mutual fund investments can make good sense for debt funds too. Before this, let’s understand what an SIP is.
What is an SIP mutual fund investment?
An SIP is an investment route wherein you must invest a predetermined amount periodically (preferably every month) on a predetermined date in a specific asset or asset class. By investing a predefined amount constantly on a specific date every month, you can avoid volatility in asset classes over the long run owing to its rupee cost averaging feature.
In a volatile phase like that of an equity market, an SIP endows you with the potential to buy a higher number of quality units when the market falls and a lesser number of units when the market rises. This makes your investment cost to average out over a long time period, making mutual fund SIP a highly convenient and reliable plan for the equity market.
Is an SIP a suitable route for debt mutual fund investment?
While most prefer opting for SIPs to invest in equity mutual funds, many often fail to recognise the benefits of SIP investment in debt funds. Being a fixed-income instrument, though debt fund is not as volatile as equity funds, they may witness volatile market phases when their rate of interest undergoes a change. As net asset value (NAV) fluctuates throughout distinct phases, you get the opportunity to lower your average investment cost in debt mutual funds too if you opt for the SIP mode. Thus, routing for SIP mode for debt funds can still endow you with rupee cost averaging benefit, particularly over the long-term period.
Also, opting for a convenient investment option like an SIP in debt mutual funds is a perfect alternative to traditional fixed-income choices like fixed deposits, recurring deposits, savings accounts, etc. This is because debt mutual funds, like conventional fixed-income instruments, offer capital protection and tend to generate higher returns than its alternative options. So, if you are one of those looking for a fixed-income instrument to include it in your investment portfolio or build a contingency fund, then you can opt for the SIP mode in debt mutual funds.
From the above, now it must be clear to you that SIP investments work well irrespective of the degree of volatility in any asset class. So, if you are a risk-averse investor looking for slightly higher returns than traditional fixed-income instruments and capital safety, then you can consider beginning an SIP in debt mutual fund scheme of your preference.