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. Most mutual fund managers or advisors hardly advocate investing in debt mutual funds through SIP. That is why it was surprising to hear Swarup Mohanty, CEO, Mirae Asset Global Investments (India), speaking about utility of SIP in debt 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:




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

	3-yr	5-yr	7-yr	10-yr	11-yr (since 2008)
Banking & PSU debt fund	7.48 (8.6, 2.4)	7.64 (8.3, 4.9)	8.08 (8.8, 7.5)	7.73 (9.0, 5.9)	7.6 (8.9, 5.5)
Dynamic bond fund	5.56 (8.8, -0.7)	6.57 (8.9, 3.2)	7.3 (9.5, 4.8)	7.82 (9.0, 5.9)	7.7 (8.9, 6.2)
Medium to long duration fund	4.88 (8.1, -5.9)	6.14 (8.5, -0.5)	6.99 (9.1, 2.2)	7.32 (8.9, 4.1)	7.25 (8.9, 4.3)
Short term	4.49 (7.8, -2.5)	5.78 (8.2, 1.1)	6.5 (8.6, 3.8)	7.26 (8.8, 5.1)	7.32 (8.9, 5.8)
Corporate bond fund	3.83 (8.4, -28.8)	5.5 (8.4, -16.0)	6.26 (8.7, -9.3)	6.58 (8.9, -3.9)	6.7 (8.9, -2.8)
Gilt fund	8.24 (12.7, 5.9)	8.40 (11.1, 6.1)	8.79 (10.8, 7.5)	8.75 (9.9, 7.5)	8.52 (9.7, 7.4)

Category average SIP returns (XIRR) are in percentage. Bracket denotes (highest per cent return, lowest per cent return) in the category.
Source: Ace MF

“Any traded asset class which has volatility and where the long term outlook is positive, SIP should work,” says Jajoo.

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.

So which debt fund category should you choose?

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.

“You need to ride through one cycle of the market. Interest rate cycles are for two to three years. You can choose a bond fund or a dynamic bond fund,” says Jajoo. “If you have a longer term horizon, SIP in gilts will also work. Gilts will give you much higher volatility and the underlying asset is also triple A and very safe,” he adds.

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.