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  • Category: Mutual Funds

    Is it prudent to invest in debt fund(s) through SIP?


    Have a query about investing in debt funds through SIP? Find answers to your queries on this Ask Expert page.

    (a) Is it prudent to invest in debt fund(s) through SIP, or lump-sum investment is preferable?

    (b) If I take six month or one year picture into consideration, can debt fund returns (half-yearly/ annual) be negative?

    Financial experts: do respond.
  • #138882
    Lump-sum or SIP is long time debate that many investors do for decades but at the end it all comes down to the two things. First being if the investor can afford to do lump-sum and second being investment horizon. Now the reason SIP makes sense is because you can invest small amount for long term. For example if you are investing 90K into the equity fund for 5 years. Is it possible for every person to invest 90K in one shot? Of-course not. Does 90K in lump sum stands against up and down in the market?

    In most of the cases when the SIP purchases the units during the market low days it purchases more units and ends up earning few percentage more than the lump sum. However when the next tide of the low days come up in the market, the SIP model with more units also suffer more loss. However for the lump sum the profit and loss remains a bit consistent unless there is major market crash.

    That's why in the long time frame either lump-sump or the SIP does not matter. But your discipline to invest at the right time matters. Also you should be proactive about what type of funds you should invest into.

    For six month to 1 year or even less than 2 years, it's safe to stick with liquid funds. For equity always think of 5 years or more horizon. And for debt and ELSS, think of 3 or more years, and no less than that.

  • #138887
    Unlike pure equity, debt funds have some fixed return. However when one invests though mutual funds, the return and risk are lesser than when one invests directly.
    SIP is resorted and becomes beneficial in the 'averaging effect' when the market price is fluctuating. On long term, over the entire average price paid by us may be a reasonable one and not affected by the extremes.
    However in the case of debt funds, the return depends on the interest rates n the debts or the return rates. As there will not be much difference in the return rates or interest rates on debts, the prices also may not fluctuate much. So the SIP may not work as good as other funds.
    In case of debt funds investment, one should see the portfolio deployment by the Mutual funds and what constitutes the deployment. If the average return by the funds is not much higher than the average bank deposit interest, for a small investor, it is better to invest directly with reputed and established companies or banks itself rather than going to mutual funds.


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