SIP in debt mutual funds: does it make sense? Look at returns, then decide
SIP or Systematic Investment Plan is an investment strategy typically associated with equity mutual funds.
“Think about an SIP in debt,” said Mohanty. “If you look at SIP in debt, they would have also given you very good returns. SIP in debt is a very decent investment vehicle. The only problem is that we do not talk much about it,” Mohanty told participants at the ET Wealth Investment Workshop a fortnight ago. Mahendra Jajoo, head-fixed income, Mirae Asset, seconded the opinion. He tweeted:
Thank you @mohanty_swarup for highlighting this. After all SIP is just an investment technique so should work for… https://t.co/abFOwcAq1O— mahendrajajoo (@mahendrajajoo) 1564799922000
ETMutualFunds.com worked with real numbers to check how an investor would have fared had he/she invested in debt funds through SIP all these years. Take a look at the table below. We have given the SIP returns for different debt fund categories for different tenures.
SIP returns in debt mutual funds
|| 11-yr (since 2008)
| Banking & PSU debt fund
| Dynamic bond fund
| Medium to long duration fund
| Short term
| Corporate bond fund
| Gilt fund
Source: Ace MF
Mutual fund managers believe investing via SIP in debt funds is more beneficial for investors who do their debt allocation through bank deposits. “Those who tend to invest in a bank recurring deposit can look at SIP in debt mutual funds because bank RDs are fully taxable, whereas you can get the benefit of long term capital gain tax benefit in debt mutual funds,” says Sunil Subramaniam, MD & CEO, Sundaram Mutual.
Subramaniam explains, “The rupee cost averaging concept in equity SIPs can work also in debt funds, but to a smaller extent. The market interest rates go up and down. The NAV of debt funds also go up and down. You can get an averaging cost in a debt fund.”
He further adds that generally debt funds have given equal returns as bank FDs and if you add the advantage of rupee cost averaging and the LTCG tax benefit to that, it can definitely be a substitute for opening RD in a bank.
Mutual fund advisors ask investors to opt for a minimum time horizon of three years if they wish to invest via SIP. They say an investor with a comparatively longer term outlook should invest via SIP.
Subramaniam recommends medium duration funds. Short term funds will not have much volatility and investors will not get rupee cost averaging. Those who have the required time can go for SIP in medium duration funds.”
Some mutual fund experts also believe that an investor can look at the entire category, depending on one’s needs and asset allocation requirement.
“There are funds like banking & PSU debt funds, corporate bond funds, money market funds that can be looked into,” says A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.