The term SIP or systematic investment plans has become synonymous with investing in equity mutual funds. While it’s a great idea to break up your long-term equity investments into regular monthly investments through SIPs, nothing should stop you from doing the same with debt funds. SIP is a facility available for mutual fund schemes in general and not specifically for equity schemes. 

How does a SIP in debt funds help?

You are likely to invest in a debt mutual fund either for a financial objective which you have to fulfil within the next 1 or 2 years or for your long-term debt allocation to balance your portfolio. 

If your requirement is geared more to the first part, you have to first estimate how much you need and when. Then apply your estimated return on the investment if you begin a SIP now. 

The SIP will allow you to put aside smaller sums of money every month towards a goal that is at least a year or two away. While SIPs in equity funds have enough time to accumulate growth, in case of SIPs in debt funds it’s a lot more about managing your behaviour. The SIP gets deducted automatically each month and you don’t get the chance to spend the money. SIP helps you lock in your savings without any negotiation. 

For your long-term allocation to debt funds, say for goals like creating your emergency fund or balancing risk in the portfolio, SIP in a debt or even a liquid fund is ideal. Along with your monthly equity fund SIP, the debt fund SIPs also get deducted keeping your portfolio balanced from the start.

Watch out for very short-term SIPs 

Where it may not work very efficiently, is in managing goals that are just a few months away. While you will be able to nudge your behaviour into investing through regular savings every month, you will lose out on growth because your goal has hardly any time. 

If you have the amount in a lump sum, SIPs for very short durations don’t make sense. SIPs are structured in a manner that help you build regular savings into investments, but also you have to give SIPs some time to accumulate growth. 

Let’s say your goal is to have Rs 1,00,000 for a car down payment, for which you have chosen to invest in a debt fund for 6 months. The fund you have chosen is estimated to return 8% annualised growth. This means if you invest roughly Rs 96,150 today and leave it in the fund for 6 months, you will have Rs 1,00,000 at the end of the period. 

If instead, you break it up into SIPs for 6 months, you will have to invest Rs 16,500 each month to achieve a total of around Rs 1,00,00. Which means you end up investing Rs 99,000 for the same outcome. 

If you have the amount in a lump sum, SIPs for very short durations don’t make sense. SIPs are structured in a manner that help you build regular savings into investments, but also you have to give SIPs some time to accumulate growth. 

In debt funds, use SIPs only for long term allocation and for goals like creating an emergency fund where the time horizon can potentially be longer.