In today’s time, Systematic Investment Plan i.e. SIP has become one of the most popular methods of investment. Earlier people used to use SIP only for investing in equity mutual funds, but now many platforms are offering SIP facility in debt funds, government bonds and corporate bonds also. In such a situation, the question that comes in the mind of many people is whether bond SIP also works like equity SIP? The answer is no. The method and benefits of both are different. Therefore, before investing it is important to understand the difference between the two.
How does Equity SIP work?
The biggest benefit of equity SIP comes from market fluctuations. Prices keep going up and down in the stock market. When the market falls, more units are purchased than your fixed monthly SIP. Whereas, when the market rises, less units are purchased. This is called rupee cost averaging. This reduces your average purchase price in the long run and increases your chances of getting a better return on investment. That means the decline of the stock market also becomes an opportunity for SIP investors.
Why is Bond SIP different?
The method of investing in bonds is completely different. The prices of government or well-rated corporate bonds do not fluctuate much. Usually only 1% to 3% change is seen in these in a few months. In such a situation, there is very little benefit of cost averaging here. When investing in bonds, your return is mostly decided at the time you buy the bond. If you hold the bond till its maturity, then the price fluctuations in between do not have much impact on your fixed returns. This is why the purpose of bond SIP is not to buy more units at a lower price, but to take advantage of different interest rates at different times.
What is the biggest advantage of Bond SIP?
Suppose interest rates sometimes increase and sometimes decrease. If you buy bonds every month, you invest at a different interest rate every time. With this, your investment does not depend on the interest rate at one time. If interest rates fall in the future, bonds purchased earlier will yield benefits. However, if interest rates rise, bonds purchased later will give higher returns. This way you don’t have to worry about choosing the right time.
How to start Bond SIP?
Today many online platforms offer the facility of bond SIP. You first have to decide in which type of bond you want to invest. After this the monthly investment amount and date have to be selected. Then auto debit is set up through UPI or e-NACH and bonds are added to your demat account every month. The interest received from the bond is deposited directly into your bank account.
Keep these things in mind before investing in Bond SIP
1. Higher interest means higher risk
If a bond is giving 11% or 12% returns, it does not mean that it is the best option. Higher interest often comes with higher risk. The risk of default may be higher in bonds of low rated companies.
2. It is not easy to leave early
After investing in bonds, if you want to withdraw money before maturity, then you may not get the right price. Therefore, start bond SIP only considering it as a long term investment.
3. Invest in different places
By buying bonds of different companies and at different times, risk can be reduced to some extent, but it cannot be eliminated completely.
Which SIP is better for you?
If your goal is to generate higher returns and create wealth in the long term, then equity SIP may be a better option. On the other hand, if you want stable income, low fluctuations and fixed returns, then Bond SIP may be better for you. Investment decisions should always be taken keeping in mind your income, risk appetite and financial goals.
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