Maximising Returns: Why SIPs in Debt Funds Outperform Bank FDs – A Guide to Investing in Mutual Funds

Discover why SIPs in debt funds outperform bank FDs in India and explore the flexibility and risks of debt mutual funds for maximising returns.

Wealthy Investment Option
  • SIPs in debt funds outperform bank FDs in India.
  • Debt funds offer flexibility for higher returns.
  • Evaluate default and liquidity risks before investing in debt funds.
  • Seek advice from a financial advisor before making investment decisions.

Investing in fixed deposits (FDs) has long been a popular option for investors looking to earn a reliable return on their money. However, a new report suggests that systematic investment plans (SIPs) in debt mutual funds may offer higher returns for investors in India.

SIPs in Debt Funds Outperform Bank FDs: The MC30 Study

According to the study by Moneycontrol, SIPs in debt funds have outperformed bank FDs over a 5-year investment horizon 60% of the time. The MC30 is a curated bouquet of mutual fund schemes across categories. It is designed to make investing simpler for the uninitiated. The study compared SBI’s FD rates over a 5-year period with the debt fund SIP return rate for the same period. The eight debt mutual fund schemes as part of the MC30 provided a 5-year SIP rolling return of 7.4–8% across the schemes. SBI offered a return of 6.75% for FD tenors of more than 5 years in 2018.

Low-Interest Rates and Debt Funds: A Match Made in Heaven

One of the reasons why SIPs in debt funds may outperform bank FDs is that despite their best efforts, banks usually dole out interest of up to around 9% for FDs - and this is usually the best-case scenario. Whereas debt funds usually offer returns upwards of 9%, provided there aren't severe headwinds affecting the markets. A well-managed debt fund can navigate relatively choppy market conditions to turn a profit.

Also ReadInvesting In Debt Funds After The RBI Rate Pause? Read This First!

Flexibility of Debt Funds: Exploring Different Options

Another advantage of investing in SIPs in debt funds is their flexibility. Investors can choose from a range of debt mutual funds that invest in different types of debt instruments, including government bonds, corporate bonds, and money market instruments. This allows investors to diversify their portfolios and manage risk more effectively.

The Risks of Investing in Debt Funds: Default, Liquidity, and More

However, it's important to note that investing in debt mutual funds carries a higher level of risk than investing in bank FDs. Debt mutual funds are subject to market fluctuations and changes in interest rates, which can impact the value of the investment. Investors should carefully evaluate their investment goals, risk appetite, and the performance of different investment options before making any investment decisions.

One risk to consider is the possibility of default by the issuer of the debt instrument. While government bonds are considered relatively safe, corporate bonds carry a higher risk of default. Bank FDs, however, are covered up to Rs. 5 lakh(including principal and interest) by Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI. In addition, investors should also consider the liquidity of debt mutual funds. Debt mutual funds may be subject to market fluctuations, and there may be restrictions on the redemption of units.

Also ReadDon’t Miss Out On These High-Return Alternatives If You Are A Debt Mutual Fund Investor Or HNI

Choosing the Right Investment Option for Your Financial Goals

In conclusion, SIPs in debt mutual funds may be an attractive investment option for investors looking to maximise their returns. The Moneycontrol report suggests that SIPs in debt funds have outperformed bank FDs in India, thanks in part to the current low interest rate scenario. Investors who choose to invest in debt mutual funds should carefully evaluate the risks involved, including the possibility of default and the liquidity of the investment. By investing wisely and diversifying their portfolio, investors can make the most of their money and achieve their financial goals.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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