SIP in debt mutual funds

We have stated a number of times in our blog that Systematic Investment Plan (SIP) is ideal mode of investment for your long term financial goals. Though SIP is very popular among retail investor in India, there is a misconception that SIP is type of investment. Whether you invest through SIP or lump sum, the risks characteristics of your investment will depend on the underlying asset class e.g. equity fund, debt fund, hybrid fund etc. SIP is simply a way of investing in the scheme of your choice. In this blog post, we will discuss how SIPs in debt mutual funds can also be part of your financial plans.

SIP returns depend on asset class

Most investors in India associate SIP with equity mutual funds only. You should have moderately high to high risk appetites for investing in equity mutual funds whether you are investing in lump sum or SIP. Till the recent correction many investors had the misconception that SIPs had low risk and rarely give negative returns. If you look at SIP returns across equity fund categories e.g. large cap, multi-cap, midcap, small cap etc., most schemes have given negative returns over the last 1, 3 and even 5 years.

As mentioned earlier irrespective of investment mode, lump sum or SIP, the risk of your investment will depend on the underlying asset class.

If you do not have sufficiently high risk appetites, then you should invest in debt mutual funds which have much lower risks compared to equity or equity oriented funds. The chart below shows the annual returns of Nifty 50 versus Nifty 10 year G-Sec Index over the last 20 years or so.

Source: National Stock Exchange

SIP in debt mutual funds

Many investors think that only lump sum investments are suitable for debt mutual funds. You can also invest through SIP in all open ended debt mutual fundschemes. You should invest through SIP in debt mutual funds if:-

• You want to invest from your regular savings in a disciplined manner for long term financial objectives. By investing from your regular savings, you can start early and give more time for investments to grow.


• You have long investment tenures and want to benefit from the power of compounding. Compounding is interest earned on interest. Compounding leads to wealth creation over long investment horizons.


• You want to benefit from volatility through Rupee Cost Averaging. Debt funds are market linked instruments and their prices may fluctuate depending on the price sensitivity of their underlying assets to interest rate changes and other factors. Through SIP, you buy units at different price points and average your cost of purchase.

SIP in debt mutual funds can also create wealth

Wealth creation potential of equity funds is known to regular Advisorkhoj readers. Debt mutual funds can also create wealth for investors in the long term. Debt funds invest in debt and money market instruments like commercial papers, certificates of deposits, non-convertible debentures, Treasury Bills, Government Securities etc.

The yields of many debt and money market instruments are higher than bank FD interest rates of similar maturities. Yields of AAA rated corporate bonds can be 150 – 200 bps higher than FD interest rates.

The chart below shows the returns of Rs 10,000 monthly SIP in BSE India 10 year Sovereign Bond Index over the last 10 years. Please note that the underlying asset of this index is the 10 year G-Sec which has no credit risk (sovereign guarantee by Government of India) but high sensitivity to interest rate changes. With a cumulative investment of Rs 12 lakhs, you could have accumulated a corpus of Rs 18 lakhs over the last 10 years. The annualized SIP return over the last 10 year was 7.7%.

Source: Asia Index (BSE and S&P DJI Venture), Advisorkhoj Research

Let us now see the results of SIP in another debt asset type, corporate bonds. Corporate bonds are subject to credit risks but give higher yields than risk free assets. The chart below shows the returns of Rs 10,000 monthly SIP in BSE India Corporate Bond Index over the last 10 years.

With a cumulative investment of Rs 12 lakhs, you could have accumulated a corpus of nearly Rs 18 lakhs over the last 10 years. The annualized SIP return over the last 10 year was 9.5%.