Debt funds, as we all know, invest in debt securities such as government bonds, corporate bonds, debentures, commercial paper, treasury bills, etc. These funds are considered to be less volatile as they do not invest in equities. By spreading the investments around different debt securities, these funds diversify the risk as well as offer stable return to the investors.
You can opt for a convenient medium of Systematic Investment Plan (SIP) to invest in debt mutual funds. SIP allows you to invest a fixed sum of money on a monthly basis. Most of the people tend to view that SIP is for equity funds only. But not many h ave heard of debt fund SIPs, which are as effective as equity SIPs. The power of averaging is also available with debt SIPs. Averaging means purchasing more units in the market downturn and less on the upside to average out the cost of purchase and get the much needed stability in your portfolio. Let’s get down to understand more about the benefits of debt SIPs in different scenarios.
Gain of debt SIPs in rise and fall of interest rates
The adverse effects of fall in interest rates apply only on the fresh investments made during the time. Previous SIP investments in debt funds are insulated from such pressure. Since the rate of existing debt fund portfolio will be more than the market in the falling interest rate scenario, the trading of the debt securities in the portfolio will be made at a premium, which will eventually benefit you as a debt fund investor. But when the interest rates start to increase, the fresh debt SIPs will offer better returns, much unlike the lower interest amount in fixed deposits and recurring deposits that offer fixed rate of return only.
You can take advantage of several tax-free dividends that are offered in the debt SIP funds. Also, you can save more on taxes with debt fund SIPs compared to some other saving alternatives. For instance-interest taxable on FD comes in the range of 10%-30%, while long term capital gain tax on debt funds is charged at flat 10% without indexation and 20% with indexation. Indexation is a tool that helps adjust the cost of investment with respect to inflation.
Applicability of Debt mutual fund SIPs
- Suitable for short-term investments
- Ideally suited for risk-averse investors
- Better alternative to recurring deposits and fixed deposits
- Can be used as a tool to build emergency reserve
- A good tool to enhance your liquidity
Things to keep in mind
- Select a debt fund that will not change the duration frequently
- Pick a debt fund matching your investment requirements
- Match your investment horizon with the duration before picking the debt fund