Systematic investment plans (SIPs) have emerged as a big wave in the Indian mutual fund industry.

SIPs have not only brought lots of investor money into the industry, but also given the dimension of discipline to investment patterns.

Most of the SIP money has flown into equity-oriented mutual fund categories.

The same form of investment can also be used in debt-oriented mutual funds.

Here’s a look at how conservative investors and those with a moderate risk appetite can use SIPs as a tool to invest systematically in debt-oriented mutual funds.

Discipline

SIPs negate the need to time the market across different interest-rate environments.

Debt mutual funds do not go through volatile phases as much as equity-oriented funds do.

But being market-linked products, they also go through market phases, especially based on interest-rate movement.

Regular SIP investments make entry and exit timing immaterial because, as the NAV fluctuates across phases, investors have the opportunity to bring down their average cost of investment, also called rupee cost averaging.

An analysis of monthly SIP returns on a rolling period basis since 2003 — across short-, medium- and medium- to long- duration funds — shows that the funds have, on an average, given stable returns for the periods analysed (one, three and five years).

This shows that by investing systematically, investors may benefit from potential stable returns of debt mutual funds, while adding the discipline aspect to their investments. SIPs in debt funds present an opportunity for investors with a relatively low-risk appetite.

For conservative investors

SIP in a debt scheme is not a novel concept.

It is similar to a recurring bank deposit, wherein investors channel a small portion of their savings every month towards their investment objective.

Furthermore, debt funds have the advantage of being more tax- efficient than banking products such as fixed deposits and recurring bank deposits, when held for over three years, due to benefit of indexation.

Investors should always have long investment tenures for their SIPs, that is, at least three years. Beyond 3-5 years (or longer), debt funds have the potential to give superior returns (8.6 and 8.5 per cent average returns over three and five years, respectively, as on August 31, 2019).

Long-duration funds have outperformed bank FD/RD, even on a pre-tax basis, over the past three years. On a post-tax basis, they would have outperformed even more due to the long-term capital tax advantage of mutual funds.

Also, since the yield curve is usually upward- sloping, yields of long-duration bonds are higher than those of short-duration bonds. Long-duration funds are usually best-suited for investment through SIPs.

Investors should consider their expected future obligations and investment time horizon and invest in SIP in appropriate categories to meet those goals.

The writer is Head, Products, Mirae Asset Mutual Fund

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