Should You Invest In Debt Mutual Funds Through The SIP Route?

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    It's easy to invest in equity mutual funds through the Systematic Investment Plan (SIP) route. There is a theory that investing in them through the SIP route helps to average out the costs, since you cannot time the market.

    Should You Invest In Debt Mutual Funds Through The SIP Route?
    It's never easy though given the fact that if there is a prolonged period of downturn in the market you may even lose through the SIP route.

    Investing in Debt Funds Through The Sip Route

    Investing in debt funds through the SIP route once again requires some knowledge. The one advantage of investing in SIPs through the debt market is that there is lesser volatility as compared to SIP through the equity route.

    The Systematic Investment Plan works in the same way for both debt and equity where you invest in monthly or periodic intervals depending on the net asset value.

    For SIPs in the debt investment route the best strategy would be to try and figure out where interest rates are headed. This would help you understand whether you should invest in debt mutual funds through SIP or lumpsum.

    Investing through lumpsum or SIP route?

    If you feel that interest rates in the economy are headed lower, you better not invest a lumpsum in a Systematic Investment Plan. This is because you would have locked in money when interest rates are high, and it would not help the fund and also not improve your own returns.

    On the other hand if you feel that interest rates are headed higher, you better invest a lumpsum as the fund would gain from rising interest rates in the future. This all again depends on the time frame.

    Presently, interest rates in the economy are headed lower as inflation has been coming in at sharply lower levels. This has given the Reserve Bank of India some room to cut interest rates going forward. In fact, the RBI has already twice cut interest rates this year.

    Also remember that debt funds attract a short term capital gains tax if you do not hold the same for more than three years. It's therefore best to hold onto to the same at least till three years if you are investing in the same.

    GoodReturns.in

    Read more about: capital gains
    Story first published: Monday, March 30, 2015, 10:16 [IST]
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