An SIP or Systematic Investment Plan is typically used to invest regularly in equity mutual funds. Does it make sense to invest through SIP in debt mutual fund schemes. Many investment experts do not think it is a smart idea, but Swarup Mohanty, CEO, Mirae Asset Global Investments (India), beg to differ.
“If you have been comfortable doing RD in banks, there is no reason why you can’t take forward the same investment behaviour in mutual funds,” Mohanty told the participants at ET Wealth Investment Workshop, held in Noida last week. “Think about an SIP in debt. If you look at SIP in debt, they would have also given you very good returns. SIP in debt is a very decent investment vehicle. The only problem is that we do not talk much about it,” said Mohanty.
Most mutual fund participants do not advocate investing in debt mutual funds through SIP, mostly because they believe the strategy does not offer any extra advantage to investors. In comparison, the volatility in the equity markets helps investors to average their purchase cost and maximise wealth, they say. However, this overlooks one important factor: most investors need to invest regularly even to achieve their short-term goals. And debt funds are the obvious choice to achieve short-term goals.
Mohanty then proceeded to another important topic that he believes will help investors to navigate testing times in the market: asset allocation and why debt allocation is important in a portfolio.
Mohanty advised the participants to never put all their eggs in one basket. He offered them some interesting numbers to chew on.
He showed the equity vs debt returns in two years: from August 2017 to August 2018 and August 2018 to August this year. In the first year, equities offered 14 per cent returns and debt gave -3 per cent. However, in the last one year, equities have not generated any returns, but debt has given 15 per cent returns.
Driving home the importance of asset allocation plan, Mohanty asked investors to maintain an allocation in both equity and debt. “Asset allocation keeps you balanced. If you invest in both sides, you get balanced returns.”
Mohanty also asked investors to avoid committing the common mistake of investing only in equities when stock markets are doing well and switching to bank deposits when the equity market is down.
“There could be a long time where the markets do not make any money. Most of the returns will come in a very short period of time. It is imperative to gather more units before this short period of spike comes. An investor with higher units will make far more money than the one who gathered lower units,” said Mohanty.
Mohanty also told the participants to stop assigning a lot of importance to the past performance of a mutual fund scheme. “Normally, investors pursue past returns. You should give some weightage to the past performance. Sadly, that weightage is normally 90 to 95 per cent. That’s not fair,” said Mohanty. “Past performance necessarily tells you the investment style of the fund,” he added.