If you are a very conservative investor, you can initiate SIP in a debt fund to save regularly...
12-Jul-2013 •Research Desk
Please guide if it is advisable to have a SIP in debt fund. The idea is to accumulate a good corpus over a period of 5 to 10 years with steady returns. If yes, which fund should I invest in?
You can do an SIP in debt funds for steady gains, but you will be surprised with the opportunity loss you would have made by not investing in a equity fund. With a tenure like 10 years you must consider equity to get at least inflation beating gains.
For instance a 10-year monthly SIP in a well-rated short term debt fund has can give annualised returns at 8.86 per cent, while the same amount invested in a good large cap equity fund can give 15.25 per cent annualised returns.
If you are completely risk averse, you can choose a well rated dynamic bond fund. These funds can invest in all kind of debt instruments with varying maturities, depending on interest rate scenario. Such flexibility helps in uncertain times. These funds adapt themselves to the changing interest rate scenario, thus reducing interest rate risk to some extent.
If you can take even a little risk in equity, consider hybrid or balanced funds, which are less risky than pure large cap funds. A well rated balanced fund has given annualised returns at 11.3 per cent over a 7-year tenure. If you invest in an equity-oriented fund, as you reach close to the goal, systematically transfer your investments to debt to protect the gains from volatility in equity markets. Balanced funds invest a large part of their assets in equity (60-80 per cent) and rest in debt. The debt portion helps in limiting the volatility in returns compared to a pure equity fund. Therefore, these funds provide better downside protection, compared to an equity fund, during market downturn.