Disciplined investing is a hallmark of prudent financial planning. We all know the concept of SIPs or Systematic Investment Plans and the benefits it provides in terms of cost averaging and regular investing. However, SIPs are more associated with equity funds as they are more volatile and generally cost averaging works more effectively there. But not many utilize the benefits offered by SIPs to invest in debt funds. In fact, investors must look at other systematic features offered by mutual funds (including SIPs) while planning their investments in debt funds. Let’s look at 3 systematic features which serve 3 different purposes with an elaboration of each:

1. Systematic Investment Plans (SIPs) for Accumulation

SIPs help you to invest regularly in a fund at a pre-determined frequency. It is an easy strategy to accumulate a larger corpus over the long term by investing smaller sums periodically and benefit from the power of compounding. One can also use the Step-Up SIP feature to hike their SIP investments every year in line with a potential rise in their annual income. The Step-Up feature helps to accumulate a larger end corpus than SIPs.

2. Systematic Transfer Plan (STP) for De-risking

STP helps to transfer a fixed sum from a source fund to a target fund at a pre-determined regular frequency provided both the funds are from the same fund house. Let’s understand how STP works. Say, Arun received a bonus of Rs 5 lakh and wants to invest it in an equity fund. However, equities being volatile, it is prudent to spread the investment across a few months rather than invest the entire sum at the same time as lumpsum. So he first invests the entire bonus in an overnight or liquid fund which has low volatility. Through an STP, a regular sum is transferred from the debt fund to an equity fund in about 10-12 installments. Through this arrangement, Arun has not only spread out the risk of investing in an equity fund, he also seeks to generate potential returns from the debt fund. This way STP worked as a de-risking strategy for Arun.

In another instance, say, you are nearing your goal which is being met from an equity fund. However, this equity fund corpus is at risk if the market turns volatile when your goal is a few months away. Hence it is prudent to de-risk this corpus by moving money from equity to debt via STP as you near your goal.

3. Systematic Withdrawal Plan (SWP) for Decumulation

With falling interest rates on traditional products, retirees face a problem of declining regular (interest) income. Not many are aware that mutual funds not only help to accumulate a corpus via SIPs to meet a goal, they can also provide a tax-efficient decumulation (regular income) solution. Retirees can choose the amount they wish to receive every month as regular income from this corpus via SWPs. The mutual fund in turn redeems equivalent units from this corpus at a monthly or such other selected frequency. Another advantage of SWPs is that they are tax-efficient as well.

Summing up

Debt funds can prove to be a good alternative for accumulation, decumulation and de-risking your investments. One can objectively use the above 3 systematic features while investing in debt funds.

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. Recipients are advised to consult its advisor/ tax consultant prior to arriving at any investment decision.

All names and situations depicted in the blog are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.