Mutual Funds Beginner

Should you begin an SIP with debt funds?

SIP with debt funds

As an investor, at some point or other, you are likely to ask: “Should I begin a Systematic Investment Plan (SIP) with debt funds?” Understandably so. After all, a lump sum investment does burn a hole in your pocket. We’ll tell you what we think, but first, let’s look at what makes debt funds an attractive option—SIP or otherwise—in the first place.

Asset allocation and fixed-income assets

All investors want to generate income from investments. But they must also make allocations in their portfolio to allow for margins of risk. You, as an investor, for instance, would probably like to ensure liquidity to take care of any emergencies.

That’s why asset allocation is important. Asset allocation refers to the direction of resources to different categories of assets, such as stocks, bonds, cash, and precious metals. Some of these categories are more vulnerable to value fluctuation, so it is prudent to ensure that one part of the portfolio focuses on fixed income-generating assets.

Investments in debt funds, like bonds, help generate a fixed income and protect you from volatility to some extent. That’s what makes them awesome

SIP in debt funds can generate relatively good returns

While people think of fixed deposits or mutual funds when it comes to SIPs, this mode of investing can also generate decent returns for debt funds. From 2010 to 2020, for instance, fixed income outperformed both equity and gold over fairly long periods.

However, as with any investment initiative, you must exercise caution and do the preparatory groundwork.

SIP in fixed-income assets can also benefit during volatility

SIPs made for fixed-income assets will insulate you from volatility. Because they are not affected by market conditions.

Why invest in debt funds through SIP

Properly planned SIPs in debt funds can generate good returns. Plus, as your investments are being made periodically, taking price fluctuations into account, they go light on your pocket.

Besides, these investments are averaged out. That means all your investments may not have been made when the prices were high.

Taxation advantage

What’s more, if your SIP investment is under the Equity-Linked Savings Scheme, you are entitled to income tax exemption in India. Need we say more?

Which debt funds are suitable for SIP?

There are different kinds of debt funds, each with its own investment goals and risk tolerance. You will be the best judge, given your requirements and circumstances. It would be ideal, perhaps, to choose to open more than one SIP under different debt funds. The different kinds of debt funds are:

1. Short-term debt funds

These are ideal if you want stability and an investment opportunity in the short term.

2. Corporate bond funds

Such bonds would be good for you if you desire higher returns and are prepared to take moderate risks.

3. Dynamic bond funds

These are for you if you are ready to take a little more risk. As the name indicates, these funds dynamically keep modifying their portfolios to take advantage of market fluctuations.

4. Gilt funds

This variety of debt funds is for you if you are the kind of investor who desires safety, stability, and assured income.
Whatever the case, please bear in mind that any changes in the interest rates, market forces, or the status of the issuing mutual fund companies could affect your returns.

How to choose debt funds for SIP

Having decided to make SIP investments in debt funds, given the huge number of assorted debt funds in the market, how do you choose which one? It may help to take the following factors into account:

Time horizon

The greater the duration, the higher returns. Most debt funds reward investors who stay invested longer as they can afford to park their funds in assets with longer gestation periods. If time is of the essence for you, choose one of the short-term or medium-term options.

Risk appetite

Once again, this depends on you and your personal circumstances. If you can afford to be adventurous, dynamic bond funds may work for you. Because they give you greater returns on your investment. If you are risk-averse, it may be better to look at one of the other options.

Investment objective

What is your objective? Creating a corpus? Saving up for a rainy day? For higher studies? To meet wedding expenses in the future? Each one of these objectives carries with it a bit of two factors: Time Horizon and Risk Appetite. Some debt funds could have exit costs, which would eat into your profits if you opt out before a certain period. These will affect your bottom line.

Portfolio turnover

The fund manager may make frequent changes in the portfolio to maximize profits, but this churning comes at a cost—brokerage costs, commissions paid out, and so on. All these costs are absorbed by the fund. As a result, you receive a lower amount in the end.


Undoubtedly, beginning a SIP with debt funds is a sound proposition, but the SIP amount, SIP duration, and the type of SIP to choose will depend on and also vary according to individual scenarios. Choose wisely.


Should I opt for a SIP or a lump sum in debt?

This would depend on your liquidity position and your time horizon. If you are looking at the short term, with price fluctuations, there may not be much of a difference. If you are planning on a longer duration, though, SIPs may help you take advantage of dips.

Which SIP is the best for beginners?

As a beginner, you may prefer one of the low-risk options, like short-term debt bonds or corporate bonds. You could always turn to the higher-risk alternatives when you’re feeling confident.

Is it good to invest in debt funds right now?

It is never too early to start, but you may want to factor in the cost and your budget, as always, before making a decision. The more diverse your assets are, the better it will be for you, and debt funds are a safe bet.

Is it good to do SIP in debt funds?

SIP in debt funds can be beneficial for stable returns, capital preservation, and liquidity. It suits investors with a low-risk appetite seeking fixed-income alternatives.

What is the difference between lumpsum and SIP in debt funds?

Lumpsum involves a single substantial investment, while SIP spreads investments over regular intervals. Lumpsum exposes to market timing, SIP offers rupee-cost averaging, reducing volatility risk.

Which type of debt fund is best?

The best type of debt fund depends on your financial goals and risk tolerance. Common types include Short-Term Funds, Liquid Funds, and Dynamic Bond Funds.

Are debt funds better than FD?

Debt funds may offer higher returns and liquidity compared to fixed deposits. Consider factors like risk tolerance, investment horizon, and financial goals before choosing between them.

Disclaimer: Risk is fundamental to the investment process in Indian stocks. Any discussion of securities in this article should not be considered a recommendation to buy or sell any security. The facts provided are for informational purposes only and should not be considered investment/financial advice from CoinSwitch.

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