What You Need to Know About SIP In Debt Mutual Funds

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Many investors associate regular investments through Systematic Investment Plans (SIP) only with equity investments through equity and equity-oriented funds. Of course, SIPs in equity and equity-oriented funds help investors buy more units when the market is down and less when the market is up. Consequently, the average cost of buying units goes down over time, and the investors significantly from the typically high long-term growth of investments. 

At the same time, with price appreciation, debt funds are much lower than equity funds, and SIPs in debt funds can serve equally important needs other than wealth creation. As some of us are aware, debt funds serve various needs of the investors along with long-term growth. By understanding the various roles debt funds can play, an investor can use SIP in debt mutual funds to get the best out of them. 

How Investing in Debt Funds Helps

Emergency needs

In emergencies, easily accessible and liquid investments are required. Depending on individual circumstances, 3-6 months of monthly expenses should at least be appropriated for such a fund where money can be parked in liquid and short-term debt funds.

This prevents the premature use of long-term growth investments such as those in equity and equity-oriented funds, protecting both savings efforts for major financial goals and losses from premature exits in adverse market conditions.

Imminent needs

These are needs that may arise in 1-2 years such as a vacation or a car down payment. Again, the money needs to be in relatively lower risk investments like short term debt funds. 

Manage overall risk

During rapid run-ups in equity markets and the appreciation of investments, investors effectively end up taking more risk than their comfort levels. By selling off a part of their equity investments and reinvesting them in debt investments, or just making fresh debt investments in debt funds, investors rectify the anomaly in risk levels.

Secure long term gains

Debt fund investments can be used to serve as lower risk parking slots for securing long term gains from higher risk growth investments. These include higher risk, higher return investments such as equity and equity-oriented funds. This becomes crucial when important financial goals like children’s higher education, child’s marriage, retirement, etc., draw nearer. Gains from long term equity investments can be transferred to relatively less risky investments in debt funds.

Regular income

Debt funds experience lower fluctuations compared to equity funds and they have an inherent feature of interest or coupon receipt from the underlying issuers in the funds. This makes them suitable for generating regular cash inflows such as in retirement. This can happen through the regular sale of units through the Systematic Withdrawal Plan (SWP) facility.

Periodic lump sum income Investments in closed ended debt funds like Fixed Maturity Plans (FMP) and target date debt funds, can provide periodic income for meeting time-bound goal based needs such as home renovation, overseas vacation, etc.

When SIP in Debt Funds Help

Prepare for emergencies

SIPs in liquid and short term debt funds can help build an emergency fund to meet contingencies such as those related to health and income emergencies like a job loss. With such debt fund SIPs, investors can build an emergency fund as suitable according to their income and requirement profile.

Save for imminent needs or short term needs

For requirements like a big ticket expense on a gadget expected to arise in 6 months to 1 year , investors can prepare themselves with SIP in debt funds like shorter term debt funds like ultra short term, low duration, money market funds debt funds. For requirements that are expected to arise in 1-3 years period, investors can consider investing in funds such as short duration funds.

Medium to long term goals

These are needs arising in 3 years or more for those investors who do not want the large market fluctuations of equities but would like to benefit from fund managers’ expertise. These can deliver returns higher than other lower risk alternatives. For such needs, investors can consider SIP in debt mutual funds having relatively higher risk and hence more rewarding, such as dynamic bond, gilt, medium duration, medium to long duration, long duration, corporate bond funds, etc.

Manage risks

In portfolios meant for long term needs such as children’s higher education and retirement, with SIP in debt funds investors can rebalance their overall investment portfolio and diversify overall risk levels. 

Furthermore, a part of the capital appreciation from equity investments can be regularly transferred with SIP in debt mutual funds like dynamic bond funds. Rebalancing can also be done by directing fresh money in SIPs.

As we have just seen, apart from wealth creation, SIPs in debt funds can help investors address a wide range of needs. In short, SIPs in debt funds can endeavour for “no slip between the cup and the lip.”  

FAQs

1. How do SIPs in debt funds compare with traditional investment avenues?

Traditional investment avenues may be safer than mutual funds. However, they may require larger investment amounts compared to debt fund SIPs and may impose penalties on premature withdrawals. Further, as debt fund managers manage risks like those related to interest rate movements and credit risk, they are considered to be in a better position to deliver higher returns than traditional methods of investment/savings.

2. Should a young investor focus only on wealth creation for long term needs through SIPs in equity funds and bypass debt fund SIPs?

Debt funds play the crucial role of wealth preservation and portfolio diversification. These investments need to be in step with wealth creation efforts to ensure no disruption to wealth creation efforts such as due to periodic liquidity needs or meeting emergencies. 

Disclaimer:        

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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