Pradeep Gaur/Mint
Pradeep Gaur/Mint

SIPs in debt funds may not give cost averaging benefit

Low-risk debt funds can serve as good vehicles for systematic savings for risk-averse investors

Is it advisable to have a systematic investment plan (SIP) in a debt mutual fund (MF) scheme?


Systematic investments provide two benefits. One, they enable disciplined and convenient investing. An investor can budget for the expenses on a monthly basis, generate savings and invest systematically in a portfolio of funds. The second benefit is that this manner of investing periodically enables investors to average their cost of entry into the market without taking risks with respect to timing the market.

When one invests in equity MFs using the SIP method, both these benefits can be realized. When it comes to debt funds, the second benefit of cost averaging does not factor in as much. Notwithstanding the volatility in the debt markets in the recent months, these funds typically do not exhibit the net asset values (NAVs) that is common with equity funds. However, SIP investors in debt funds will still be able to realize the benefit of disciplined and convenient investing. Hence, low-risk debt funds such as short-term and ultra short-term funds can serve as good vehicles for systematic savings for the risk-averse investor.

I have been investing in a technology equity scheme for the last five years and have made handsome gains from it. I also have SIP investments in a large- and mid-cap scheme. Do you think it makes sense to book profits in the sectoral fund and invest it in another equity fund?

—Sahil Kumar

Equity MFs that focus on the technology sector have done well in the last few years. However, since these are sector funds, they do carry higher risk than diversified funds. Hence, when opportunities arise, as is the case now, it is indeed a good idea to book some profits and divert them to diversified funds.

From among the technology funds, the ones from Franklin Templeton and ICICI Prudential have performed the best. If you are holding one of them, I would recommend that you divert the profits booked over to Franklin Templeton Prima Plus fund or ICICI Prudential Dynamic fund. Both these funds are diversified large- and mid-cap funds that do not have any sectoral bias.

I have a considerably high risk-appetite. Is it a good idea to invest in a small-cap equity scheme for the long term?

—T. Jayanthi

It is always a good idea to have a mid- and small-cap equity fund in your portfolio, especially if you have high risk appetite. However, that does not mean that your portfolio consists of just these funds. You should invest in different types of funds, including large-cap, diversified and debt fund, so that you have a well-balanced portfolio that will perform well in different market conditions. In the small- and mid-cap segment, ICICI Prudential Discovery, Religare Invesco Mid Cap, and SBI Emerging Business funds are good choices.

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