65366In view of reduced inflation and expenses, will it be right to invest in IT stocks?

Systematic Investment Plans, or SIPs, in equities mutual funds are a well-known phenomenon nowadays, thanks to investor awareness and enthusiasm around the stock market. SIP is a method of investing modest sums of money in mutual funds to build a corpus that matches one’s investment horizon – short to long term – in equity or debt. However, for many investors, SIPs in debt funds remain uncharted territory. Let’s take a look at factors why you should invest in debt funds through SIPs:

Better for short-term goals

By investing in debt funds through SIP, you can plan towards short-term goals in a much better way. ”Fairly good returns, less volatility, and a variety of options for different tenures make investing in debt mutual funds SIPs a good strategy. For short-term goals, one should go for debt mutual funds and through SIP if you are salaried to keep you more disciplined towards investing,” said Manish Hingar, Founder of Fintoo.

“However, I think that it makes more sense to invest through SIPs in equities as the equity asset class is more volatile. For the long-term goals, SIP in equity works best,” added Hangar.

Earn from big spending

It can also help you to accumulate a lump sum amount towards the end of the financial year for paying big expenses like life and health insurance premiums. Not only paying premiums, but you can also plan your lumpsum investments for the next year. This is because if you deposit the full amount of Rs 1.5 lakh in PPF at the beginning of the year (before 5th April) you get the maximum amount of interest for your deposit. Consider this: If you deposit Rs 1.5 lakh every year at the start of the financial year, before April 5 each year, you will earn around Rs 2.69 lakh more than the investor who deposits at the end of the financial year. The maturity value stands at Rs 40.68 lakh if you invest at the start of the financial year (before 5th April). The same amount works out to Rs 37.98 lakh if the investments are made at the end of every financial year for the lock-in period of 15 years at an interest rate of 7.1 %.

Rupee cost averaging 

You get enhanced returns through rupee cost averaging during volatility as it aids in reducing the portfolio volatility and balanced the asset allocation. Debt funds also provide a wide range of fixed-income investment options that cater to your different risk and investments needs.

Taxation

The tax aspect is another reason to invest in debt funds via SIPs. It is worth emphasising because it is a significant benefit that SIPs in debt funds have over traditional investment options such as bank RDs. Debt funds have a lower tax rate than bank RDs. While bank RD interest is taxed at the investor’s marginal tax rate during the investment’s duration, debt fund returns are taxed only upon redemption, and long-term investors (3 years or more) can take advantage of indexation benefits at a 20% tax rate.

Low-risk

For investors who don’t want to take equity asset class risk, SIP into debt funds is a good saving option. But if you want higher returns, then you have to add equity to your portfolio. However, investing in debt through SIP can inculcate the good habit of saving in mutual funds.

“There are some investors who do SIPs in debt also, but it is the smaller proportion of what people do when it comes to equity SIPs. Equity SIPs are more of a route towards wealth creation investing into a wealth-creating asset,” Deepak Jain, Head- Sales, Edelweiss AMC.