Systematic Investment Plan (SIP) is typically associated with investing in equity mutual funds. Over the years, mutual fund houses and investment advisors have been underscoring the importance of staggering investments in equity schemes to tackle the volatility in the stock market. However, a small number of investment experts have been asking their clients to employ the same method while investing in debt mutual funds.
“SIPs are the best way to gradually build a corpus. While you continue to invest in equity funds, you have to have a share in the debt funds as well. You can definitely invest using SIPs in debt.” says Apoorva H Vohra, Founder, Finolutions Wealthcare.
Earlier this month, Mahindra Jajoo, Head -Fixed Income, Mirae Asset Global Investments (India), told ET.com that investors should consider starting an SIP in a bond fund the way they do in equity funds to surpass volatility.
SIPs are generally suggested to investors looking to invest a fixed amount of money in equity mutual funds periodically to create a corpus to meet long-term financial goals. The basic idea is to average the purchase cost over a long period to maximise the wealth. Since an SIP investor continues to invest through different phases in the market he will lend up averaging his holdings. For example, he will get less number of units during a bull phase and more units during a bear phase.
However, the scenario is not similar in the money market. They are relatively less volatile and the chances losing a large part of investment is really remote. That is why nobody actively recommended SIPs in debt mutual funds.
The major reason why an investor goes for an SIP is firstly to benefit from the market volatility. Secondly, it is easy for a small investor to invest some amount periodically. In short, the SIPs benefit from volatility. Debt markets also see volatility but not as much as equity markets.
Many investment experts believe that the interest rate scenario is a bit confusing at the moment as there are lot of uncertainties due to demonetisation and its impact on future rate cuts at the moment. That is one of the reason why many of them are advocating SIPs in debt funds.
Interest rates play crucial role in debt investments. In a falling interest rate scenario, debt funds, especially long-term ones, would offer attractive returns. “It is a good time to start an SIP in debt. We can’t be sure about what will happen to the interest rates in the coming three years,” says Apoorva H Vohra.
Dynamic bond fund are one of the best bets if you want to invest using SIPs in debt funds. These funds invest in all kind of debt instruments with varying maturities. Volatility in these funds is positive for the SIP investors. The dynamic bond funds also have a reduced interest rate risk because of their ability to adapt with the changing interest rates.