Should you do a debt SIP?

By Morningstar |  17-05-19 | 

Is it wise to invest in debt funds via SIPs? 

- Pulkit

A Systematic Investment Plan, or SIP, is a mode of investment that suits retail investors. And more often than not, it is equated with investments in equity funds, not debt.

There is a reason.

It is an excellent tool to deploy when it comes to investing in the equity market since volatility comes with the terrain. It enables the investor to average out the cost of his investments through disciplined purchases across market cycles. So when the market is down, more units are purchased, which ultimately benefits the investor when the market recovers.

For this reason, SIPs tend to be synonymous with equity instruments since buying on the dip is very relevant.

An SIP in a debt fund is not common for a few reasons.

Typically, debt funds are not as volatile as equity funds. Hence the issues of averaging out your costs or buying units at significantly lower prices does not really arise.

Moreover, the gains in debt funds come from three sources – coupon receipts, reinvestment income on coupon receipts, and capital gains/losses from changes in interest rates. Coupon receipts from the fixed income instrument accrue steadily to the scheme throughout the year. Due to this, the NAVs of debt funds (particularly short-term accrual funds) tend to move upwards steadily (except for longer duration funds which are relatively more volatile).

Hence, a lumpsum investment would make more sense than investing the same corpus in a staggered manner systematically.

However, if one is invested in long duration funds such as gilt funds, an SIP could benefit the investor in averaging his purchase cost if interest rates hit a rising cycle (since bond prices have an inverse relation with interest rates). In such a scenario, investors end up purchasing more units on the dip in NAV which would pay off when the interest rate cycle reverses.

One last point. AN SIP in a debt fund is often wrongly equated with a recurring deposit (RD). Both have fixed amounts going out from your savings account into the investment, but the RD will give you an assured rate of return, unlike the debt fund.

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