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Don’t SIP in short-term debt funds

Investors seem to be flocking to short-term debt funds or liquid funds with tenures of less than one year. With the Union Budget making debt funds taxation unattractive for tenures of between one and three years, investors feel that they are better off betting on these short-term schemes, say fund managers. Interestingly, some are even taking the systematic investment plan route, recommended for long-term funds or equities. “Investments in debt funds especially liquid funds is happening by way of SIP. This may also be because there is no exit load and lock-in in these funds,” says Anutosh Bose, chief operating officer at LIC Nomura Mutual Fund.

Like in case of equities SIP is a way to discipline investment habits. It is mostly advised for equity investment due to higher volatility in the asset class. This makes cost averaging is more prominent in equities than in other asset classes. And hence SIP is more associated with equities.

“Bond yields can also be volatile as it linked to the money market. Investors put money when the bond yields are moving up. Sometimes when bond yields sit at 8.50 – 9% levels, like the case now, investors hold back investment thinking it may move up further,” says Murthy Nagarajan, head – fixed income at Tata Mutual Fund.

According to R Sivakumar, head – fixed income at Axis Mutual Fund systematic investment in any asset class works better if invested through one whole cycle. “If one had invested in debt funds (through SIP) four to five years back, he / she would have seen better results.” Interest rate cycles are usually stretched over four to five years.

As per data from mutual fund rating agency Value Research, over the last five years liquid funds returned over 7.50%, income funds around 7%, short-term and ultra short-term funds gave close to 8%. Last three years: income funds returned 8.45%, liquid funds close to 9%, short-term funds and ultra short-term funds around 9%. Last one year: income funds have returned close to 9%, liquid funds over 9%, short-term funds around 10.50%, ultra short-term funds close to 10%.

But now is also the right time to invest in debt funds through SIP, feels Nagarajan, as rates are stagnant for sometime and rate cuts may not happen immediately. Additionally, the idea behind investment through SIP is taking out the time call. An SIP of Rs 5,000 in liquid funds at nine% over next five years would give Rs 3.77 lakh. However, interest rates are likely to start moving down in the medium term. And SIP in debt is recommended in a rising interest rate scenario, says Nagarajan.

Sivakumar adds that ideally SIP when done in longer tenure debt funds give better results. “Shorter tenure funds like money market and liquid funds are less volatile when compared to longer tenure debt funds like income funds. Consequently, the benefit of cost averaging through SIP will be less in shorter tenure funds.”

SIP in debt funds is recommended as introductory product for risk averse investors. Investors can use SIP route to accumulate and then shift the amount periodically to another asset classes, suggests Bose. Even those with regular income could opt for SIP in debt funds.

Savvy investors could invest a lumpsum given the bond yields are high presently. And follow up this investment with SIP later, may be when rates fall, says Sivakumar.


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