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Fixed income investors are currently in a soup. The rising inflation could lead to negative real interest rates earned on their fixed income investments. On the other hand, the possibility of rising interest rates is making investors uncomfortable with locking in rates in long-term bonds at this juncture.

If you are a cautious investor and want to preserve your capital by investing in debt, there is a way out of this difficult situation. A systematic investment plan in debt funds will help them overcome a lot of many problems. Here is how it would help.

Invest as you earn

Many individuals end up spending money if available in a bank account. But a debt fund SIP can help you avoid such a situation without taking extra effort. SIP allows you to invest as you earn. Most of us earn a salary each month. Some part of your income kept aside and invested through SIP in a debt fund can be of great value in the long run. You can accumulate a corpus and then decide what you intend to do with it.

Higher tax efficiency

Many of us want to keep some money in an emergency fund. Bank fixed deposit is the first choice for such investments. But the interest paid on it beyond a certain limit is clubbed to one’s income and taxed as per slab rate. Since emergency funds may seldom be used, the interest earned keeps getting taxed. Instead, if you initiate an SIP in a bond fund, then the money can stay there as long as possible and enjoy the benefit of compounding. If the units are held for more than three years, then capital gains on sale are taxed at 20% post indexation. That significantly improves the post-tax and post-inflation returns on bond funds.

Lower interest rate risk

Are you worried about the interest rates moving upwards? If we lock in for the long term, then we cannot take advantage of rising interest rates. And if we invest in short-term bonds and fixed deposits, then we have to make peace with very low-interest rates. Hence it makes sense to initiate an SIP. Even if you start investing in a medium duration bond fund or a short duration bond fund with around three years duration, then you need not worry about the volatility. If the NAV dips due to rising interest rates in the interim period, then you get more units in subsequent installments of SIP. Rupee cost averaging thus helps you beat the risk associated with rising interest rates.

Helps in meeting goals

If you are keen on starting an SIP in debt funds, ideally go for low-duration funds or short-duration funds. These may be less volatile in case the interest rates go up too fast and too much. Short duration funds can be rewarding for most investors and help you save for short-term goals or let you invest that portion of long-term goals which is earmarked to fixed income.

However, while investing you should not chase yields and you should not put all your money in stocks or equity funds just because the returns are poor in short duration funds. An SIP in a debt fund can ensure peace of mind in addition to healthy risk-adjusted returns.