Systematic Investment Plans Today
Systematic investment plans made within equity mutual funds have gained credence as investor awareness surrounding them has increased. That being said, SIPs made within debt funds remain unchartered territory for several investors.
Systematic investment plans enable investors to direct modest sums of money into mutual funds such that they can create a corpus for themselves keeping in mind their investment horizon. This time frame may be short or long term and is possible within equity as well as debt.
Mapping Out Debt Funds
Debt funds are classified as a kind of mutual fund that invests money in fixed income securities. There is limited to no exposure within equity markets here. While large chunks of the Indian population tend to save their money via bank deposits over the short term, debt funds can be used as opposed to recurring deposits in banks keeping in mind the maturity periods they offer. By investing in a debt fund using a systematic investment plan it is possible to accrue greater risk-adjusted returns in comparison to recurring deposits.
Assessing Why You Ought to Select a SIP in a Debt Fund
The reasons why you must consider selecting a systematic investment plan in a debt fund are as follows.
- For starters, you can invest in small tranches thereby exposing yourself to far less risk
- Next, these investments are much like bank deposits but provide you with superior returns
- This form of investment can potentially enhance your returns via Rupee Cost Averaging during instances of volatility
- Given that fixed income will be added to the portfolio, it is possible for the portfolio to experience less volatility and take advantage of a well-balanced asset allocation
- It is possible to accrue greater returns over fairly long investment tenures
- You have the option to select from a wide range of fixed income investment options that cater to varied risk profiles and investment needs
- Debt funds also happen to be more tax-efficient in comparison to recurring deposits made at banks
- Finally, this form of investment is ideal for those who wish to make arrangements for short term goals
As an investor, you can take advantage of any one of the debt funds available in the market that are categorized in accordance to their period of maturity which ranges from 1 to 5 years. You have the option to opt for ultra-short-term funds that mature within a period of 3 to 6 months and can be used to fulfil immediate goals keeping in mind your threshold for risk. Given the small time frame for lending, ultra-short-term funds have a greater risk level attached to them in comparison to liquid funds. That being said they are still classified as low-risk category funds when set against other funds operating within the same category.
In the event that you have a risk profile that requires you to invest with the utmost care, debt funds are likely to be one of the best investment options available to you. Prior to selecting a given debt fund, you must always take into account what interest rate applies to it. Bond funds, corporate debt funds, and banking PSU funds each provide AAA-rated viable instruments that have fairly stable portfolios and feature a time frame that ranges from 3 to 5 years.
Understanding the Returns SIPs in Debt Funds Provide
SIPs in debt funds are capable of generating fairly good returns over long time frames of investment. While SIPs in debt funds may come across as a new investment opportunity for most investors, they must not be overlooked. They make the most of volatility via the Rupee Cost Averaging of the price for which they were purchased. While investors might ordinarily link volatility with equity investments, fixed income is also capable of being affected by volatility owing to changes within credit spreads and interest rates. The longer a debt fund is active, the greater is the price volatility within it owing to changes in its bond yields.
To conclude, it is important to note that not all debt funds are viable for systematic investment plans. Long investment terms are ideal as SIP returns provide the most for those that opt for longer tenures owing to the power of compounding. Debt funds that feature a greater amount of volatility and require long investment time frames ought to be considered for systematic investment plans. Short duration funds, dynamic bond funds, corporate bond funds, banking, and PSU funds, and gilt or long duration funds are each suitable for SIPs. In contrast, however, overnight funds, savings funds, money market funds, and liquid funds are not appropriate for SIPs. Always consider your threshold for risk and what money you can afford to lose prior to investing in a SIP in a debt fund.