Is SIP in Debt Mutual Funds a Good Investment decision for common man?
My readers ask about systematic investment plans (SIPs).
This form of investing has become very popular as it allows us to manage investment risk easily.
Investors get very attracted towards equity through SIP route.
The reason for this attraction towards equity is because of possibility to earn high returns.
In order to balance between risk and return, SIP is one of the best investment tool.
But differently in this article, we will talk about SIP in debt mutual funds.
Debt linked mutual funds already represent risk free form of investing.
Hence, is SIP in debt mutual fund a good investment decision?
I think this question can best be answered by first understanding the investors psychology.
Investors psychology
For defensive investors, starting SIP in debt mutual funds can be considered a good investment decision.
Debt linked investing is already a defensive form of investing.
When we add SIP to debt-investing it becomes more systematic.
Instead of putting all money at a time, SIP asks investors to spread it into a wider horizon.
When it comes to equity linked investors, spreading investment over a period of time gives benefit of rupee cost averaging.
Returns of equity linked investments are very volatile hence rupee cost averaging works well there.
But returns of debt linked investing plans are already predictable, so why we must opt for SIP here?
SIP in Debt Mutual Fund is a good decision
For long term wealth creation, I feel SIP in debt mutual funds can be a great investment vehicle.
Though debt funds gives comparatively lower returns than equity linked plans, but SIP in debt funds can prove very inspiring.
As I said earlier, a for a defensive investor there is nothing more inspirational than seeing their corpus grow each month.
But I would like to make a point here first. Returns from debt mutual funds cannot beat inflation.
So if one decides to start SIP in debt mutual funds instead of equity, it is like a opportunity loss.
In long term, equity plans are preferred because it can beat inflation.
But still I will maintain my stand that SIP in debt mutual funds can be a good investment decision, how?
There is not doubt that long term return from equity is superior to debt mutual funds.
But if investors psychology is defensive, negative effect of inflation is not a main investment criteria.
For defensive investors, building a ‘continuously growing wealth’ more important than ‘fast compounding of money’.
A lot of energy of defensive investors goes into managing following three investment milestones:
- Increasing risk-free source of income
- Saving Money by optimizing spending habits
- Consistently appreciating wealth
SIP in debt mutual fund can help defensive investors to manage all these three milestones in one.
Starting SIP will help investors to divert funds consistently, hence inculcating a savings habit.
As debt funds can give long term, risk-free return in range of 8% per annum.
It means it helps in capital appreciation as well.
Debt funds also provide investors with option of income generation.
One can start SIP in debt mutual funds with monthly income plan.
One of the best CRISIL rated debt funds is SBI Magnum Fund.
Annualised return of SBI Magnum fund, in last 7 years is provided here as an example:
Conclusion
SIP in debt mutual funds is a good investment decision for defensive investors.
I have observed that a large population represent ‘boundary investing’.
By boundary investing I mean a mix of aggressive and defensive investing.
Aggressive investors invests in 100% equity and defensive investors invests in 100% debt.
For boundary investors there is a investment option called balanced fund.
Mutual fund companies have developed balanced funds whose investment portfolio includes a clever mix of equity and debt.
In a growing economy like India, investing in balanced fund can be a good option.
A balanced fund portfolio consists of 75% equity and 25% debt.
Hence, comparatively the return of balanced fund, in long term, is higher than debt funds and less volatile than equity funds.
One of the best CRISIL rated balanced funds is ICICI Prudential Balanced Fund.
Annualised return of ICICI Prudential Balanced Fund, in last 7 years is provided here as an example:
