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Why SIP in Debt Funds Could be Essential?

Why SIP in Debt Funds Could be Essential?

Risk-averse investors invest in debt fund investments to minimise the risks associated with investing. Many also tend to make lump sum investments. The reason is simple. Lump sum investments may offer protection from losses due to interest rate fluctuations.

But doesn’t mean that new investors must avoid SIP or systematic investment plan-based investments altogether in debt funds. In this blog, we discuss two instances wherein SIPs can be useful.

Two situations when SIP in debt funds could be essential

#1. If you want to further reduce investment risk

Debt funds may have lower risk than equity funds, given the latter’s susceptibility to market fluctuations, with their volatility going up with time.

For investors who are unaware, there are three kinds of risks associated with debt mutual funds:

Interest rate risk: Interest rates are inversely proportional to bond value. Longer the bond’s maturity period, more likely it will be exposed to interest rate fluctuations. So, the returns will be affected when you invest for a longer duration with the interest rate falling at maturity.

Credit risk: Debt funds help you invest in institutions after checking their credit rating. Naturally, as a risk-averse investor, you’d invest with an institute with a high credit rating. Although credit ratings can change quickly and that can have an impact on your returns.

Liquidity risk: Fund managers often might be forced to sell securities at a loss if the demand for the securities is lesser and you’ve agreed to sell the holdings before maturity. Again, this results in a loss of returns.

Remember, when you make a lump sum investment, you invest all your money at once and get a one-time return at the end of the term. This means the market conditions affect all your funds when your term ends. But when you invest through SIPs, you earn the benefit of rupee-cost averaging, especially over the long term. This lowers investment risk significantly.

#2. If you want a high liquidity investment option

When you make a lump sum debt investment for a specific term and wish to withdraw your funds before the given tenure, you might be charged an exit load fee. This could be a large amount depending on your investment amount.

In contrast, if you invest the same amount through SIPs in the same debt fund, the exit load charged may be lesser. This is because every investment through SIP is a new purchase, so the exit load fees get calculated based on the redemption amount and the SIP instalment.

If you’re a beginner, considering investing in debt funds through a Systematic Investment Plans would benefit from consulting a professional before beginning your investments. Tata Capital Wealth can help you with this. We provide investing help as well as tailored financial products suited for your investment goals.

Not just that. You can rely on us to  grow your finances with insights from our skilled wealth managers, gain research insights through our platform and enjoy exclusive privileges as well. Visit Tata Capital Wealth to learn more.

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