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How does SIP in Debt mutual funds work?

By investing a fixed amount every month (or any other interval) from your regular savings, you can invest over a long period of time and benefit from the power of compounding. Power of compounding does not only work for equity, it also works for fixed income over long investment tenures.

By investing a fixed amount at regular intervals (monthly or any other), you will be investing at various price points and average out your purchase cost. This is known as Rupee Cost Averaging. Since fixed income funds are market linked schemes their prices are also subject to volatility (albeit lesser than equity funds). Through SIP you can take advantage of volatility even in fixed income funds especially in longer duration fund which are more sensitive to interest rates.

Fixed income can outperform even in the long term

Extreme market conditions often challenge popularly held views. One view is that equity always outperforms in the long term. This is largely correct because historical data shows that, equity has been best performing asset class in the long term. However, conventional thinking about what constitutes long term is now being challenged. The chart below shows the annualized average returns of some equity and fixed income categories over the last 3, 5 and 10 years. You can see that in certain market conditions, fixed income funds can outperform equity even over fairly long tenures.

Past performance may or may sustain in future. The returns shown above are returns of the category and do not in any way depict the performance of any individual scheme of any Fund.

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