What are the merits of debt fund systematic investment plans?
Equity is exciting. But Debt Funds are dependable. No wonder, the latter (despite generating relatively lesser returns than equity) has emerged as a strong contender in the mutual fund's ecosystem. However, not many investors explore an additional tool which can further alleviate the debt fund investing experience in terms of risks as well as returns. It is none other than Systematic Investment Plans or SIPs.
While SIPs are commonly used for entering the equity landscape, not much is heard about the merits of debt fund SIPs.
1: Volatility
One of the biggest arguments in favour of SIPs is that they take away the need to continuously monitor the market and find the “best” time to make the investments. If the markets are witnessing a lot of ups and downs, SIPs help to average out the cost of purchase and protect from entry-point risks. As a result, they help to act as a hedge against the equity market volatility. So, would debt funds which are known for stability (rather than volatility), benefit from SIPs?
Of course, yes. It is important to understand that debt funds are comparatively more stable than equity funds. However, they also are impacted by volatility or fluctuations in interest rates. Bond prices and interest rate movements are inversely related. Hence, any fluctuations in the interest rates will have an impact on the NAV of the debt funds. Moreover, factors such as inflation, currency movements, FPI withdrawals, etc. also contribute to debt fund volatility. SIPs help cushion the negative impact of such volatility.
2: Flexibility
SIPs are a win-win proposition. They cultivate the habit of financial discipline while giving flexibility to investors. SIPs allow the flexibility to adopt a dynamic approach to investing. For example, in a falling rate regime, bond funds perform well. However, if the situation changes and the interest rates start heading north, you can reduce your allocation to these funds through Flexible SIPs. This arrangement helps to lessen the downside risks substantially.
3: Avoid economist bias
Future predictions or trends are made basis past data. No financial expert (including the fund managers for the best debt fund online) can predict the future movements of bond prices or interest rates with 100% accuracy. Economic variables often may not move as per the expected frameworks and hence carry a certain degree of risk. Lump-sum investments suffer from this risk of economist bias. SIPs, on the other hand, can tackle or manage these risks to a good extent.
4: Performance comparison
Here is a look at the some of the best debt fund online and their 10-year returns through lump-sum as well as SIP schemes.
The SIP schemes outperform the lumpsum investments by 30 to 60bps. This differential may seem insignificant but in reality, it can lead to substantial wealth appreciation in the long run.
Finding the best debt fund online is an easy task. A visit to a good online aggregator will give you all the scheme details along with the relevant information such as AUM, expense ratio, returns, consistency, SIP amount etc. These data points should form the basis for a well-researched decision about the best debt funds for you.
Final Words
Debt-funds are the ideal route for defensive investing. SIPs can be like the cherry on the top. They can help transform the defensive investing into a more systematic way of investing.
Investors (especially the conservative ones) strive for three major goals – save more through regular and optimized savings, generate higher risk-free returns and steadily appreciate wealth. Debt Fund systematic investment plans can help in achieving all these three milestones through one step.
