Whether in equity fund or debt fund - all can benefit from the disciplined investing through SIP

A lot has been written about the benefits of SIP in equity funds. However, little has been discussed about the same in the context of debt funds. Click on the link to understand how SIP in debt funds can be useful to you:

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The English translation of the article is as under:

“My daughter is studying in the 10^th standard now. She would be ready for the college in a few years. I want to be financially ready to fund her education.” A proud father of a daughter was talking to his friends. Let us analyse the situation.

The daughter is going to college for higher education in just three years. There is a possibility that they have figured out what kind of course and college that she may attend. It does not matter whether the girl and the parents have decided on the course. Whether they have decided or not - whatever the case, there is a need to be financially ready. If one has not done anything so far, one needs to start investing as soon as possible.

However, in this situation, the goal is very close – just three years away and a serious one at that. Due to such a short time period, it would be unwise to take an exposure to equity. That means, one should avoid investing into equity mutual fund in such a case. At the same time, one has 36 months to accumulate the money. Such an investor should consider investing through SIP.

The option now for the investor is to consider doing a regular monthly investment in a fund that is not risky, i.e. one may consider a debt fund (especially short term debt fund or an ultra short term debt fund). Such funds invest in debt securities issued by various companies, banks and even government. since the investments are in debt securities, the funds are a lot safer than equity mutual funds.

Since most of the discussions on SIP end up talking about long term goals and SIP in equity funds, many are not aware that it is possible to fund near-term goals through SIP in fixed income funds, too. While discussing the benefits of SIP, majority of the experts highlight two benefits (1) Rupee cost averaging, and (2) Power of compounding. The former is derived due to the volatility inherent in equity, whereas the latter too is a function of the nature of equity to potentially provide high returns in the long run. As can be seen, both the major benefits talked about are related to equity. However, some of the underplayed benefits of SIP are as under:

·      SIP brings discipline to one’s savings approach

·      SIPs allow large sums to be accumulated even by saving small

·      It helps automate the savings approach

In the situation described earlier in this article, or any such similar situation, it is possible to accumulate the required amounts through SIP in debt funds.