When one talks of systematic investment', one usually refers to a recurring deposit in which a fixed amount is invested in a bank every month. Or a chit fund at the local jewellery store. Or a systematic investment plan (SIP) in an equity mutual fund.
Now, however, it is also possible to invest debt funds through the SIP route.
Through the last year or so, as returns from equity instruments declined, investors preferred safe and stable instruments like debt mutual funds. This was one of the reasons why fund houses started offering SIP investments in debt funds. The principle behind investing in debt funds through SIPs is the same as that behind a bank recurring deposit. And, this is what mutual funds are banking on. Most fund houses are offering SIP routes for some debt funds in their portfolios.
Jaya Prakash K, head (products) at Franklin Templeton Investments, says, "We are pushing SIP in debt funds like a recurring deposit. Three years ago, mutual funds began to push fixed income funds to retail investors. Now, investors are more open to debt funds. Once the product category is more acceptable, you can push new concepts. Earlier too, systematic transfer plans (STPs) or dividend transfer plans were popular."
STPs, however, involved investing a lump sum from which a particular portion was invested in debt instruments every month and retail investors found it difficult to put aside a huge amount.
One reason why people could consider investing through the SIP route is earlier, interest rate cycles were stretched over four to five years; now, these have shortened considerably. So, investing through SIPs can act as a guard against volatility in interest rates, says Jaya Prakash K.
This is why SIP investments are better for schemes in which the rates are marked-to-market, that is, longer duration funds like income funds. However, these might not be viable for short-term funds like liquid or ultra short-term funds.
Vikrant Mehta, head (fixed income) at PineBridge Investments (formerly Tata AIG) says SIP investments for debt funds are more beneficial when rates are stable or in a rising interest rate cycle, as these help contain volatility in prices.
It is expected interest rates would decline from current levels.
"Over the past few months, volatility in interest rates has reduced. Thanks to regulatory guidelines, markets have become orderly because hot money flows, as well as bulk borrowings and issuances, have reduced. This has led to some stability in the movement of interest rates," says Mehta.
The SIP route could be a good option for those with regular incomes who want to allocate a certain amount towards debt investments. "It encourages a disciplined approach towards investing. If investors see they are getting orderly returns for a longer period and there is more certainty in the returns, they would be encouraged to invest in debt funds through the SIP route," Mehta adds.
Through its recently-launched banking debt fund Religare Asset Management Company is offering SIPs. It plans to extend this to other debt funds as well, says Sujoy Das, director and head of fixed income. "Fixed income products would continue to deliver superior returns in an investor's portfolio and investments through SIPs would facilitate investors to participate in a periodic manner. Since interest rate movement is cyclical and spread over varied time periods, SIP investments are also encouraged. Moreover, SIPs can be used as a tool by investors for accumulation in an investment class to achieve diversification," he adds.
On the popularity of debt funds through the last year and a half, Anil Rego, founder and chief executive, Right Horizons, says debt as an asset class has found favour over the past few quarters, owing to the high interest rate environment and the consequent high yields and lower or volatile returns from equities and other risk asset classes. "Traditionally, debt funds have had inflows in lump sums. However, due to lackluster flows in mutual fund schemes, asset management companies have also started providing for SIPs in popular debt schemes. It might be a good idea to participate in long-duration debt schemes through the SIP route, as the running yields on the schemes are touching double-digits returns. This trend could continue until the general interest rates in the economy fall meaningfully," Rego says.
However, unlike equities, in which long-term SIP investments are advised, in debt funds, it could be a short-term phenomenon, as when yields fall, debt the investment may not look as attractive as other asset classes, he adds.