A Systematic Investment Plan is an easy and convenient way to invest in mutual funds. But do not get confused with SIP and mutual funds, they are not the same. Several individuals who are new to investing often confuse SIP for mutual funds. However, a SIP or systematic investment plan is one of the ways to invest in mutual funds. Mutual fund houses offer investors with two payment options – they can either make a lumpsum investment by going the traditional way or they can consider investing in a mutual fund SIP.
A Systematic Investment Plan or SIP allows mutual fund investors to invest small amounts at regular intervals just like a fixed deposit. SIP investors get to choose the amount they wish to invest, so that they do not have to feel the pinch while committing to mutual fund investments. All an investor has to do is instruct their bank following which, every month on a fixed date, a predetermined amount is debited from their savings account and electronically transferred to the mutual fund. If you are a KYC compliant individual, you can even start a mutual fund SIP by visiting the fund house/AMC’s website and navigating to their SIP page.
Equity funds and debt funds are both mutual funds who share a different investment objective and risk profiles too. Before moving on to understanding whether SIP is better for equity or debt funds, we need to first understand what mutual funds are and how they work.
A mutual fund is a pool of funds from a capital raised through investors sharing a common investment objective. What fund houses do is that they collect money from such investors and invest this capital across the Indian and foreign economy through a mutual fund. The money is invested across multiple asset classes like equity, debt, debentures, government securities, corporate bonds, etc. The performance of a mutual fund highly depends on the performance of its underlying assets.
What are equity funds?
Mutual funds are further categorized by SEBI (Securities & Exchange Board of India) based on their unique characteristics like nature of the scheme, investment strategy/objective, fund size, etc. so that investors are able to make an informed investment decision.
Equity funds are those funds that invest predominantly in equity and equity related instruments. Equity mutual funds invest in stocks of companies along with other money market instruments. Since these funds invest heavily in equity, equity mutual funds are considered to be highly volatile in nature.
What are debt mutual funds?
While equity funds invest predominantly in equity and equity related instruments, debt funds invest in fixed income securities. A debt mutual fund invests in debt related instruments like certificate of deposits, call money, corporate securities, government bonds, etc. Debt funds generally offer low interest rates as compared to equity funds, although this may not be true in every situation.
What is SIP better for – equity funds or debt funds?
Before determining which mutual funds are better for SIP, let us first understand the perks of SIP investments. A systematic investment plan allows investors to benefit from rupee cost averaging. Every month, SIP investors are allotted units depending on the fund’s current NAV and depending on the investment amount. When the NAV is high, investors are allotted lesser units. Similarly when the NAV is low, investors are allotted more units. If you invest in mutual funds via SIP for the long run, you can even benefit from the power of compounding and witness your small investment amount turn into a large corpus.
So whether you invest in equity funds or debt funds through SIP, you are going to benefit either way. It all boils down to what is your investment horizon and risk appetite. Depending on that you can decide whether you should start a SIP in equity funds or settle with the lesser volatile debt funds.
Mutual fund investments are subject to market risks, read all scheme related information carefully.