SIP in debt mutual fund

Most of the investors link systematic investment plan (SIP) with equity mutual fund. There is hardly anyone talking about investment in debt mutual fund through SIP. The reason why investment in equity fund is suggested through SIP route is that the stock market is more volatile, and SIP helps investors to tackle this volatility. SIP is used to invest a fixed amount regularly, which helps an investor to take care of volatility in the market and average out their investment. This helps them to create a corpus to meet long-term financial goals.

Nonetheless, in the case of debt markets it shows much lower volatility and hence there is no need to average out the investment. In the case of debt funds, there are two factors that generate returns for you. First is the interest receipts from the bonds where your fund has invested, and it will accrue steadily to the scheme throughout the year. Second, the price gains on the fixed income securities where you have invested, due to market adjusting to interest-rate changes. Interest on the investment securities will keep on impacting net asset value (NAV) of the fund. If there is no adverse impact of the prices of the bond your NAV will continue to rise. Hence, you might not suffer a capital loss on your debt fund, if you remain invested for more than one year.

Hence, SIP may not be helpful in debt funds, as much as it is beneficial in case of equity funds. The best you can replicate the SIP in debt fund is where they are more volatile in nature. Therefore, long duration fund which is most volatile among all the type of debt funds, you can use SIP. Various studies show that in the case of debt funds, SIP can generate better returns than lumpsum where the fund has invested in long-term and medium-term fixed income securities.