The term SIP orhas become synonymous with in . While it’s a great idea to break up your long-term equity into regular monthly through , nothing should stop you from doing the same with debt funds. SIP is a facility available for schemes in general and not specifically for equity schemes.
How does a SIP in debt funds help?
You are likely toin a debt 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 .
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 theif 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. Whilein have enough time to accumulate growth, in case of 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 youror balancing risk in the , SIP in a debt or even a is ideal. Along with your monthly SIP, the also get deducted keeping your 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 intothrough 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 toin a debt fund for 6 months. The fund you have chosen is estimated to return 8% annualised growth. This means if you 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 intofor 6 months, you will have to Rs 16,500 each month to achieve a total of around Rs 1,00,00. Which means you end up Rs 99,000 for the same outcome.
If you have the amount in a lump sum,for very short durations don’t make sense. are structured in a manner that help you build regular savings into , but also you have to give some time to accumulate growth.
In debt funds, useonly for long term allocation and for goals like creating an emergency fund where the time horizon can potentially be longer.