Investing With SIPs? Look Beyond Equities

Apart from building a corpus for long-term goals, providing short-medium term returns and tax benefits are important considerations while investing. Debt funds can help you achieve these goals, so don’t limit your SIP investments to equities, advises Hemant Rustagi

One of the hallmarks of the mutual funds industry in India has been its ability to introduce innovative products. The current product mix offered by mutual funds allows investors with different risk profiles, time horizons and investment goals to design portfolios to suit their needs.

Besides, SIPs have emerged as one of the most efficient ways of building a corpus over time by investing in a disciplined manner. Having a disciplined approach allows investors to limit their downside and reduce the variance on their returns. Also, by investing a fixed amount at a pre-decided interval regardless of the market conditions, investors can remove emotions from their decision-making process.

However, most investors take the SIP route only for investing in equity and equity-oriented hybrid funds. They feel that SIPs are suitable only for these funds as they help to benefit from ‘averaging’. The truth, however, is that by following systematic investing in a limited manner, investors miss out on the real benefits of this investment approach.

There is no doubt that a disciplined approach is the best way to invest in an asset class like equity to achieve long-term goals like children’s education and weddings, as well as retirement planning. However, in order to achieve their short- and medium-term goals, investors also need to look for efficient investment options in terms of their potential to earn higher returns and the tax efficiency of returns.

Today, mutual funds offer a variety of debt funds to this end. There are liquid, ultra-short term, short-term as well as medium-term debt funds. These funds invest in money market instruments, PSU bonds, corporate debentures and government securities. Moreover, being mutual fund products, they have an edge over traditional investment options like fixed deposits, bonds and debentures in terms of tax efficiency.

The tax benefits of investing in debt funds are as follows:

*Paid by the mutual fund

Let’s take an example to understand this. For an investor who falls under the 30 per cent tax bracket, the post-tax return on a FD offering interest of 10 per cent would be seven per cent, as the interest is taxable at one’s nominal tax rate. As is evident, it’s time for investors to choose mutual fund products such as short-term debt funds and income funds following an accrual strategy over recurring deposits. While guaranteed returns are the major attraction in traditional options, proper selection of debt funds and their superiority in terms of tax efficiency as well as time commitment can enhance the overall portfolio returns.

Of course, one has to be prepared to face some amount of volatility at times. But as in the case of equity funds, a disciplined approach to investing through SIPs can turn the volatility to your advantage through cost averaging.

The table here provides a glimpse of the returns some of the funds have delivered for those who invested through SIPs:

** Annualised Returns              Performance as on October 15, 2013
(Past performance may or may not be sustained in the future.)

While past performance alone shouldn’t be the sole criterion for deciding the product mix in the portfolio, it is amply evident that debt funds have an edge over traditional investment options in more ways than one.

Hemant Rustagi
CEO, Wiseinvest Advisors