Debt SIP - Is it worth it?

Investing through SIP route is one of the most popular ways of putting money in mutual funds. Inflows through SIPs contribute over 10 billion dollars to the mutual fund industry AUM every year. Investors wanting to follow a disciplined path to investing use SIP route wherein a fixed sum is invested in mutual funds every month. SIP investment is mostly concentrated in equity mutual funds. The reason for the same is that in equity the returns are volatile and hence putting a monthly amount leads to automatic cost averaging, thus, negating timing effect from the investment. Also, SIPs are generally meant to go on for years and equities are expected to outperform every other instrument in the long term so equity SIP makes sense.

Covid pandemic has dented the returns on equity mutual funds. With 5-year SIP return turning negative a rude shock has been delivered to investors especially the ones who have entered the equity markets in the past 4-5 years. Amidst the fall in the performance of equity funds, there is a growing voice among a section of investors, advisors & media about the benefits and need of debt SIP. With this post, we aim to answer all you need to know about investing in debt through an SIP mode.

SIP in Debt Mutual Funds a Good Investment? - Getmoneyrich

Debt mutual funds are suitable for investors who don't have high return expectations and are looking for alternatives to bank FDs and other fixed-income instruments. The time horizon for debt investments can be as short as a few days to as long as 10 years. Most of the people invest in lump sum mode in debt mutual funds. Debt mutual funds return is rangebound as the money invested is lent to corporates, government, and other bodies. The interest on the lent money is passed on to investors. For instance, ICICI Prudential Short Term Fund, a debt fund meant for a 1-3 year time horizon has a 3-year CAGR of 7.60% and a 5-year CAGR of 8.44%. Aditya Birla Sun Life Corporate Bond Fund, another debt fund meant for even longer durations than ICICI Prudential Short Term Fund has a 5-year CAGR of 8.90%. Debt mutual funds are conservative in nature and aren't meant to mirror equity returns. Investment in debt mutual funds through SIP mode has the following advantages:

Disciplined investing - Just like any other SIP, debt SIP also leads to the accumulation of money in a disciplined way. One can compare the same to opening an RD with a bank or post office minus the withdrawal restrictions.

Emergency Corpus - Debt SIP will lead to the accumulation of a steady amount which will not be affected by market movements. Thus, in case of emergency, reliance on equity portfolio can be risky as the market crash can dampen even 10-year returns but in case of debt, the returns will be intact and ready to be withdrawn.

Flexibility of withdrawal - The amount invested in debt funds can be withdrawn at any point. Most of the debt funds don't have an exit load. There are no penalties or charges for withdrawal of money.

Returns - Debt funds are capable of delivering better tax-adjusted returns than any other fixed-income instrument as it has been shown in the example in the previous section. With the fall in FD rates to sub 6% pre-tax it is impossible for FDs to beat inflation. In this case, debt comes to the rescue of conservative investors.

Return snapshot of SBI Short Term Fund (Source: Moneycontrol)


Tax Benefit - Investors in debt mutual funds get the benefit of indexation after 3 years from the date of investment. This can lead to significant cost savings for investors in higher tax brackets.

Cushion for the overall portfolio - Debt SIP has a lot of impact on the performance of the overall portfolio during the period of a market downturn. Not only it acts as the emergency corpus, but, it also is the only segment that gives positive returns during the bearish phase, thus zooming out the negative effect of fall in equity prices on the portfolio.

The ultimate portfolio rebalancer - It is often observed that when markets correct sharply, a lot of people want to invest money in equities as the lower valuations make a case for averaging. But due to a liquidity crunch, this isn't always possible. A debt corpus built by the way of SIP can be used to shift money from debt to equity during this time. Thus the role of debt SIP in portfolio rebalancing is immense.

We have seen that an SIP in debt mutual funds is the right step towards building a financially independent lifestyle. Not only it has the capability of giving better returns than bank FD but also at the same time it provides flexibility, helps in increasing portfolio returns, and helps in portfolio balancing. Certain factors such as investment horizon, tax implications, etc, are to be considered before starting a debt SIP.

For any queries feel free to reach us on finriseinvesment@gmail.com or +91-8568953926.

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