While many investors tend to prefer investing a lump sum amount in the asset class of their choice, it may not always turn out to be the right move. Instead, investing in an asset class via an SIP can be much more favourable and provide far better returns in the long run. Systematic Investment Plans (SIPs) in the equity space have almost always managed to perform admirably well. But would such a scheme work for debt funds? Let’s find out.
An SIP is basically an investment plan that requires you to invest a fixed amount regularly (preferably each month) on a given date in a particular asset or a class of assets. By investing a predetermined amount consistently on a given date every month, investors can successfully circumvent volatility in the asset in the long-term. When done for a long period of time, SIP investments only reduce the cost of ownership, but also provide more stable returns.
Rupee cost averaging is one of the many reasons why investors prefer SIP when it comes to investing. In a volatile environment such as the equity market, a Systematic Investment Plan gives you the ability to purchase more units when the market is falling and lesser units when the market is on a rise. This tends to average out the cost of investment over the long-term, making SIP a convenient investment plan that’s tailor made for the equity market.
Now that you know to opt for an SIP to help your money grow, let’s see if you should opt for it if you’re investing in an asset class with far lower volatility, such as debt funds.
The rupee cost averaging factor in an SIP works best when faced with a highly volatile market such as the equity market. The debt fund market, on the other hand, doesn’t suffer from such high bouts of volatility. Instead, the only volatility it suffers from is when the interest rates are changed by the Reserve Bank of India during its quarterly Monetary Policy Committee (MPC) meetings. In that case, will an SIP provide any benefits to investors looking towards debt funds?
Of course. Although the volatility in debt funds is considerably lower than that of the equity market, it is not non-existent by any means. And so, SIP investments can still provide investors with the benefit of rupee cost averaging, especially in the long-term, since the volatility of debt funds tends to go up as you increase the period of investment.
Also, starting a convenient investment plan such as an SIP in debt funds is a great alternative to other, more traditional fixed income options such as Recurring Deposits (RDs). One of the primary reasons for this is the higher return generating potential of debt funds, which can be leveraged to the maximum using a Systematic Investment Plan.
As you can see from the above, SIP investments work regardless of the amount of volatility in the asset class. And if you’re a conservative investor looking for maximum safety and stable returns, then open a demat account and start an SIP in debt funds may just be the way to go.
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