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SIP on debt funds to tide over interest rate volatility

, ET Bureau|
Last Updated: May 26, 2020, 09.48 AM IST
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Summary To offset poor equity returns, advisers are asking savers to buy debt SIPs.

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Many financial planners have been recommending SIPs in liquid and ultra-short-term funds to meet goals over the next three years.
To offset poor equity returns, advisers are asking savers to buy debt SIPs. Liquid and ultra-short-term funds are prescribed for those with short-term goals. Those with a longer investment horizon should look at long-duration or gilt funds.

“SIPs in debt mutual funds help you ride interest rate volatility and build long-term wealth. They are affordable as investors can start with small amounts,” said DP Singh, executive director, SBI Mutual Fund.

Singh said in the next couple of decades, as the Indian economy matures further, average return expectations would be in line with those in the developed economies. Thus, on a risk-adjusted basis, debt allocation will be an important pivot for long-term investors.

Although systematic investment plans (SIPs) in debt mutual funds have been present since long, asset managers and distributors focused on SIPs in equity-oriented mutual funds. Inflows through such SIPs have stayed above 8,000 crore per month for more than 16 months, with cumulative collections crossing 1 lakh crore in last financial year.

The industry does not release separate data on debt and equity SIPs, although rough estimates show debt SIPs at less than 5% of the total funds garnered.

As in equities, volatility in interest rates poses a market timing risk for lump sum investors in long-tenure debt funds. So, distributors believe SIPs starting at 1,000 are better bets.

“Investors are unsure about future cash flows as their business income is affected, some face job loss or salary cuts. In this changed scenario, they are not sure if they can hold on to future equity investments for long term. Hence, these investors can opt for SIPs in liquid and ultra-short-term funds,” said S Shankar of Credo Capital.

Data from Value Research show that on an average, a five-year SIP in a gilt fund has given 9.34% returns; it is 6.49% in a liquid fund.

Many financial planners have been recommending SIPs in liquid and ultra-short-term funds to meet goals over the next three years.

“An SIP in liquid and ultra-short-term funds is a good tool for near-term goals like buying a car, paying annual premiums or funding a vacation,” said Harshvardhan Roongta of Roongta Securities.



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