Combine your SIPs with long-investment horizon for better results

Expert advice on how to many the most of your systematic investment plans

With the growing popularity of systematic investment plans (SIPs), most investors nowadays take this route when investing in equity MFs.
 
However, the use of SIPs has still not become as common in debt funds, where it can be advantageous as well. 
 
“We think of SIPs mostly in the context of equities, since the equity market is more volatile and the concept of rupee-cost-averaging is more relevant there. But an SIP is a good idea in the case of debt funds too,” says Joydeep Sen, corporate trainer (debt market) and author.
 
Introduces discipline
 
For people who earn a monthly salary, SIPs in debt funds can help them build their debt allocation steadily. “Salaried people can have a defined amount going into SIPs. Otherwise, it could get spent elsewhere. It is a good way to gradually build up your corpus for achieving large financial goals. The investment required may not be available at one go but can be built over time through SIPs,” says Sen.
 
Beat interest-rate volatility
 
Not just equity funds, even debt funds can be volatile. When interest rates move up, bond prices, especially longer-duration bonds, fall. This affects the net asset values (NAVs) of bond funds adversely. In February 2021, for instance, corporate bond funds lost 0.56 per cent on an average, according to data from Value Research.
 
By taking the SIP route in debt funds, investors can handle such volatility better. “Currently, we appear to be at the bottom of the interest-rate cycle. An SIP can capture both the upside and the downside in NAVs, and thereby average out the cost of purchase of units over the long term. Hence, an investor can start a debt fund SIP irrespective of where we are positioned in the interest-rate cycle,” says S Sridharan, founder, Wealth Ladder Direct. An SIP removes the need to time the market. “The debt fund investor, doing an SIP, will be able to benefit from the lower NAVs during those phases of the cycle when rates are moving up,” says Sen.
 
Benefit from changing credit spreads
 
Bonds with varying levels of credit risk have different yields. The difference in yields (called spread) between, say, AAA bonds and AA bonds, also keeps changing. Sometimes, the spread could be 200 basis points, and sometimes (when the fear of default is higher), it can rise to 400 basis points. Such movements, too, affect bond prices. By investing in a staggered manner through SIPs, investors can benefit from such fluctuations.
 
SIP with a long-term view
 
Even when you are investing for the very long term, say, for your retirement or for children’s education, you cannot build a pure equity portfolio, as it would be too volatile. So, you need to have exposure to debt. This can range from 20-50 per cent, depending on the investor’s risk appetite.     
 
Most investors are likely to use a mix of low- and medium-duration debt funds in such portfolios (some who have the risk appetite, or have an advisor to guide them, can also invest in longer-duration debt funds).