Hello Readers!
SIP or Systematic Investment Plan, an easy and convenient way to invest regularly in mutual funds. It has become more synonymous with investing in equity mutual funds. It works great in dividing your long-term equity investment into regular small monthly installments. As it is convenient investing via SIP, people do invest in Debt mutual funds via SIP.
However, it is said that investing via SIP benefits more when the investment is taken for the long-term, this statement often raises a question. If SIP works more when you invest in the long-term, then does it make sense to invest in short-term debt funds via SIP?
Well, SIP is a way to invest in mutual funds and not in Equity mutual funds. That means we can invest via SIP in debt funds.
Do SIP In Debt Funds Help?
People investing in debt funds have different investment tenure, like some people invest for 1-3 years, while some people invest for 6 months to 1 year, as per their goal’s requirement. While some people also invest in Debt mutual funds for their long-term debt allocation to balance their portfolio.
Those investors who plan for 1-3 years of investment in debt mutual funds, for them SIP can prove to be the best way to invest in Debt funds. These investors first need to calculate how much they need and how much time. Then they can apply their estimated return on the investment if they begin a SIP now.
If you are planning to invest in debt funds for your long-term debt allocation, say for emergency funds or to balance out your portfolio risk then investing in debt funds or liquid funds via SIP is a good option. Investing in debt fund via SIP that means automating your investment in debt funds also. This helps you get your debt allocation deducted with equity allocation automatically, thus keeping a balance between both.
When you choose SIP’s for your long-term funds, they get proper time to grow, while for your allocation in short-term debt funds for 1-3 years, it is a must for you to keep your investment regular and managed. Thus, SIP works much better in these cases. With the automation facility in SIP, your installment gets deducted automatically each month and you don’t get the chance to spend the money. SIP helps you lock in your savings without any negotiation.
What About 6 Months To 1 Year Debt Investments?
SIP works out better for debt investment for 1-3 years, however they do not work out so efficiently for very short-term debt investments say 6 months to 1 year. There are chances that you might lose the growth of your very short-term investments while investing in it through regular savings every month as they have very little time to grow.
For example, let us say that Soham, wants to buy a car, and for that, he requires Rs 1,00,000 lakh after 6 months for the down-payment. He chose to invest in Debt funds for 6 months with an expected interest return of 8%. If he does it via Lump-sum, sat if he roughly invests Rs 96,150 today and leaves it in the fund for 6 months, he will have Rs 1,00,000 at the end of the period.
If he does it via SIP, then he would have to invest a certain amount for each month. If we break his investment in a 6-month installment then he would have to pay around Rs 16,500 every month for 6 months and will achieve a total of around Rs 1,00,00 after 6 months. If we calculate his total invested amount 6 SIP installments sums up to Rs 99,000 which is comparable more than the invested amount via Lump-sum.
Simply if we conclude, we can say that if we have a lump-sum amount in hand, then we must go through lump-sum investment for very short-term durations. SIP’s work in a way that helps you to convert your regular saving into investments and create a god corpus, but for that, they need time to add the effects of compound interest on the investment and accumulate growth.
However, one can go investing in debt funds via SIP, if their investment in debt funds is meant for their long-term debt allocation or when their investment horizon is between 1-3 years.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).