Kiran Telang ABT Capital Advisors
When one talks about mutual fund investing through SIP, it is usually taken as investments in equity funds. Let us look at the other side of the asset class- investing in debt funds through the SIP mode.
The primary benefits that investing via SIP brings to investors are as mentioned below:
Disciplined investing: Automated debits through ECS or post-dated cheques (PDC’s) bring in a great amount of discipline in investing. This by itself can be a big support to wealth creation for many investors. In absence of automation in saving and investing, many would procrastinate and lose out on opportunities of wealth creation. SIPs in both equity and debt funds offer this benefit.
Managing market volatility: As the date of purchase and the amount is fixed, the investment happens irrespective of the market conditions. Over a period of time this leads to lowering of average cost of purchase. This works even better in falling or volatile markets. This results in better returns when the markets move up. As opposed to this, if there is no SIP, investor psychology would be to avoid buying in falling markets and buying when they are up.
Debt markets are also volatile, though not as much as the equity markets. This is primarily because in debt products there is also a component of coupon which keeps adding to the paper, irrespective of the market conditions. The volatility happens because of the mark to market requirements and the fluctuations in the interest rates. Buying into duration funds in an increasing rate scenario would show good returns when the rates start falling. Over 2013 the debt markets have been pretty choppy due to various reasons. So purchasing through SIPs in such situations benefits the investors.
Choosing debt funds for SIPpingThe range of debt mutual funds is quite extensive - from liquid funds at one end to gilt funds at the other end. Each category of funds will respond differently to the changing interest scenario. The other factor which comes into play in case of debt funds is credit quality of its holdings. Lower the credit quality of the holdings, higher the risk. You have to decide on the SIP in debt funds based on your investment requirement and your risk appetite. The benefits will accrue only if you continue through an entire cycle in the fund. In a rising interest rate scenario the overall returns for the open ended long term debt funds will fall. While the reverse will be true in case of a falling interest rate scenario. For investors who are trying to build up a corpus for some short term goals, SIPping in ultra-short term funds would make sense. For someone with a longer investment horizon- beyond 2-3 years, funds with higher duration would be better. These investors could also look at dynamic bond funds. Such investments could be a part of the overall asset allocation and could be used for rebalancing as well as and when the need arises.
Other factors in Debt SIPpingMost debt funds have exit loads for a defined period. While doing investments through SIP you should be aware of the repercussions of an early exit from these funds. It will entail paying the exit load which eventually affects the returns. Thus to be on the safer side it is better to count the exit period from the date of the last SIP instalment.
This problem can be avoided if you had a lumpsum amount, in the first place. But for most investors, creating a lumpsum corpus is the first step, which can be done through SIP. Once a corpus is created through SIP, then you could take tactical calls based on the interest rate scenario to move the lumpsum between various categories of debt funds.
What are the alternatives to SIP in Debt FundsThe alternative to regular investment in debt funds through SIP is recurring deposits for short and long term and PPF for long term. A laddering strategy is also sometimes used with NSC,KVP and fixed deposits. All these investments have some pros and cons as compared to debt mutual funds:
1. They offer fixed rate of return. As a corollary we can say that they do not offer an opportunity of improving returns with changing interest rates.2. The investments once fixed cannot be changed easily, unlike in debt MFs where there is more flexibility in terms of changing the amounts and schemes that you can invest into.3. The lock-in periods are generally longer on these options as compared to debt MF’s (varies for various categories of debt funds)4. These options offer only one type of exposure to the underlying, whereas you can have a mixed bag of underlying with debt mutual funds-ranging from money market, corporate debt to gilts.
Conclusion:SIP in debt funds as a strategy can be used differently by different investors. The type of debt fund in which the SIP needs to be done will depend on the risk appetite of the investor, the investment horizon and the goals for which the investment is being done.
The author is a member of The Financial Planners’ Guild, India (FPGI) . FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.
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