When we think of systematic investment plans (SIPs), we think of equity investments, not fixed income. There is a reason for this: the equity market is relatively more volatile and the significance of buying at lower prices is higher. However, there are arguments in favour of SIPs in fixed income funds as well.
We all know the concept and logic of SIPs: they average out your cost of investments, align with your cash flows, and instill financial discipline.
Of EMIs and recurring deposits
Let us present a different perspective to the concept of disciplined savings / investments. The equated monthly instalments (EMIs) you pay for your home loan are conceptually an investment in real estate. The difference between SIPs and EMIs is that with SIPs you are investing as and when you earn, and then gain from your investments. With EMIs, you have availed of a loan and purchased an asset even before you have earned, and have committed to pay back the loan. Hence, in EMIs, rather than earning from it, you pay interest. Recurring deposits with a bank is another system that is conceptually similar to SIPs — you earn and build your corpus in a disciplined manner .
Also see: Inflows surge 6 times in 8 years: How mutual fund SIPs have grown in Modi regime
To build a corpus for your financial goals, savings are key. The phase of life in which you are earning, saving, and building up the kitty for your financial goals, you are doing it crumb by crumb, every month. You may have a lump sum for investment once in a while, but not every month.
Asset allocation helps us reach our goals
Then there's the importance of allocation to various types of assets, e.g., equity, fixed income, gold, real estate, etc. A properly allocated portfolio balances out the fluctuations of equity, fixed income, and other investments to an extent.
The advantage of cost averaging will be there in fixed income funds as well, albeit to a lesser extent than equities. If you follow the discipline of SIP for a long period of time, you will be buying at relatively lower prices and thereby averaging out your costs. There is no need to time the market.
Conservative investors can look at shorter-maturity fixed income funds as an alternative to bank deposits, and the SIP in these funds as similar to a recurring deposit. Fixed income mutual funds are market-linked investments as the daily NAV is as per market levels, but a SIP over a long horizon in shorter-maturity fixed funds will give decent volatility-adjusted returns. You may have started your portfolio with a lump sum investment, but as and when you get more investible funds, you can add to it. If you already have the discipline of SIPs in equity, you can add fixed income SIPs also, instead of making ad-hoc investments.
Strategy for debt SIPs
If your investment portfolio is skewed in favour of equity, there are two ways of de-risking. One is to book partial profits and move part of your equity to fixed income. However, if you have a long horizon, you need not do that urgently. The other way is to allocate your incremental investments to fixed income. How much incremental investment you allocate to fixed income, e.g., 50 percent, would depend on your risk appetite and investment horizon. This would lead to a gradual re-balancing of your portfolio.
You will reap the benefit of allocation to equity when the market grows, and have stability from fixed income in times of correction in equity markets. Thus, debt and equity SIPs will help you reap the benefits of diversification, de-risking, income generation (at the fixed income rate), cost-averaging (buying more when yields are high), and compounding.
As of March 2024, there were 8.4 crore SIP accounts, or folios, with an average ticket size of Rs 2,294. Approximately 90 percent of SIP money flows to equity. While equity creates wealth over the long term, there is always a case for allocation to debt. The fixed income component imparts stability to returns from your portfolio and also creates your wealth, though at a relatively slower rate than equity.
Joydeep Sen is a corporate trainer (financial markets) and author.
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