IDFC Mutual Fund Starts Campaign 'SIFI'. Should Buy Into the Idea? - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

IDFC Mutual Fund Starts Campaign 'SIFI'. Should Buy Into the Idea?
Sep 23, 2020

Systematic Investment Plan (SIP) is one of the most popular modes nowadays to invest in equity-oriented mutual funds. In volatile market conditions -- as what we are witnessing currently -- and when markets correct, SIP proves to be a meaningful mode of investing in mutual funds. The rupee-cost average feature of SIP enables to mitigate the volatility in the journey of wealth creation.

Further, the habit of saving and investing regularly (every week, month, quarter) to build the desired corpus for the envisioned financial goal is inculcated. And with the right choice of schemes amongst the various categories and sub-categories, SIPs can help you compound wealth ---work wonders in the long run. When you align SIPs to your envisioned financial goals, the need to borrow money to fulfil the goal possibly is eliminated. For example, instead of an education loan for your children, an adequate corpus can be built to fund their higher studies if the SIP route is taken (by selecting the best mutual fund schemes). SIP can prove to be a rewarding strategy.

--- Advertisement ---
India Rushes to Prepare for a 2-Front War

A 2-front war is here.

China and Pakistan seem to be acting in sync... when it comes to attacking India.

Both countries have increased their military activity in the border region like never before.

And that's exactly what India is rushing to prepare for.

In fact, the Indian government has already allocated Rs 90,048 crores for 2020-21 itself.

Plus, an additional Rs 4 lakh crore would be spent over next 5-7 years.

This money will secure our borders. will potentially trigger a mega growth opportunity for a select few Indian defence companies.

With this flood of money flowing their way... their stock prices could potentially shoot up to record highs in the coming years.

You can learn everything about this massive opportunity tomorrow at our Explosive Profits Summit.

At this summit, you will also get the details of what we believe is India #1 defence stock pick.

It's a potential 10x opportunity in the long term.

Click here to sign-up instantly here. It's free.

Does it make sense to SIP into debt mutual funds?

A SIP in debt mutual funds is largely unheard of.

Nevertheless, IDFC Mutual Fund is taking the road less travelled. The fund house has started a campaign SIFI (SIP in Fixed Income) to promote the concept of SIP for its debt funds investors.

  • "There is a lack of awareness about debt SIPs. SIFI can help generate better risk-adjusted returns, and your debt fund SIP can help cushion the impact of higher volatility in equity markets, thereby balancing your allocation" -- Mr Vishal Kapoor, CEO, IDFC Mutual Fund in a media briefing.

Can SIFI prove to be as effective as SIP in equity?

At PersonalFN, we have undertaken a comparative study of SIP returns vis-a-vis lump sum returns of debt funds in the past. We found that rupee-cost averaging didn't work efficiently in case of SIPs in debt funds. Lump-sum investments in debt funds have generated better returns as compared to SIP investments across almost all sub-categories, barring a few such as Gilt Funds and Dynamic Bond funds.

[Read: Should You Consider Starting SIP In Debt Mutual Funds?]

Do note that although debt funds are less risky than equity-oriented funds, they are not risk-free or safe. In reality, debt funds mainly carry three types of risks prominently -interest rate risk, credit risk, and liquidity risk.

NEW: 5 Pandemic-Proof Smallcaps You Should Know About...

Interest rate risk can be managed by choosing the debt scheme paying heed to the interest rate scenario. For example, now when interest rates seem almost bottomed out (after 250 basis points cut in policy rates since February 2019), shorter duration funds---mainly a Liquid Fund and/or Overnight Fund ---would be a prudent choice for the safety of the capital over returns. The longer end of the yield curve could be more sensitive to interest rate risk.

Speaking of the credit risk and liquidity risk, amid the current COVID-19 crisis and grim macroeconomic indicators, managing these risks would be a herculean task. This is because the credit risk has intensified and a few fund houses are displaying apathy for sound risk management while managing the debt portfolio. Many debt funds (irrespective of their maturity profiles) have kept investors on the tenterhooks due to the frequent default episodes.

Side-pockets can dampen the efficacy of SIFI approach further...

Suppose a few companies default on their debt obligation and thus face credit downgrades, NAVs of the debt funds holding these securities will drop to commensurate with the fall in the valuation as per its weightage in the underlying portfolio.

But if a fund house creates side-pockets by carving out troubled assets and allows new purchases and redemptions only from the standard portfolio; SIP investors can't take advantage of the fall in the NAV. On the contrary, their existing investments will still reflect the loss on account of defaults and downgrades. Such practices can make SIFI less effective.

On the backdrop of the above, it is not necessary that SIFI will lower the risk and help to clock better risk-adjusted returns.

For many categories of debt funds, SIFI might be irrelevant

Overnight funds and liquid funds are meant for investors who have a lump sum surplus which they don't intend to utilize immediately. More than capital appreciation, the aim of such categories is safety over returns and liquidity. Thus, SIFI could become irrelevant for such debt fund categories.

In the current context, since the interest rates are near to their historic lows and have almost bottomed out now, SIP in a few other sub-categories, such as gilt funds and long term debt funds, would also not make much sense.

So, do not buy into the idea of SIFI in a jiffy. Only a sensible and astute investment approach will help manage investment risk and pave the path to wealth creation.

Starting a SIP in a debt mutual fund scheme that does not follow sound investment systems and processes won't make any positive difference to the risk you are exposed to. The risk profile of such a debt scheme could still be high. When you select a debt mutual fund scheme for your portfolio, pay attention to other factors such as:

  • The portfolio characteristics of the debt schemes
  • The average maturity profile
  • The corpus & expense ratio of the scheme
  • The rolling returns
  • The risk ratios
  • The interest rate cycle
  • The investment processes & systems at the fund house

Our friends at Quantum Mutual Fund have highlighted the secret behind their debt management strategy, which has helped them provide safety and liquidity to investors when it comes to investing in Quantum funds. Don't Worry, Quantum Liquid Fund always aims for Safety and Liquidity.

On the other hand, if you are an ultra-conservative investor, you may avoid debt funds altogether and prefer fixed deposits instead.

Happy Investing!

PS: If you wish to select worthy mutual fund schemes, I recommend subscribing to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

Every month, PersonalFN'sFundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Author: Rounaq Neroy

This article first appeared on PersonalFN here.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "IDFC Mutual Fund Starts Campaign 'SIFI'. Should Buy Into the Idea?". Click here!


More Views on News

An Update for Those Looking to Trade Crude Oil and Natural Gas (Fast Profits Daily)

Oct 21, 2020

Trading crude oil and natural gas in the near future will be challenging. Here's why...

Will Pharma and Healthcare Funds Improve the Health of Your Portfolio? (Outside View)

Oct 21, 2020

The COVID-19 pandemic has turned to be a high-growth opportunity for India's Pharma and Healthcare Sector.

It Makes Perfect Sense to Look at Defence Stocks Now (Profit Hunter)

Oct 21, 2020

India's recent defence push might just be the start of big things in this space. Here's why...

How to Invest When Inflation is Higher than Interest Rates? (Fast Profits Daily)

Oct 20, 2020

Retail inflation is at 7.34% but fixed deposit rates are below 6%. What should you do?

How to Participate in India's Drone Revolution (Profit Hunter)

Oct 20, 2020

The Chinese drone market is 14 times that of India's. Billions may flow into Indian drone companies too. Don't miss out on this wealth creating opportunity.

More Views on News

Most Popular

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

The 'Seedhi Baat, No Bakwaas' View on ITC (Profit Hunter)

Oct 12, 2020

Is ITC an investment or a speculation at current levels?

One of the Best Investment Opportunities in the Market Right Now (Fast Profits Daily)

Oct 16, 2020

The one sector that you should be looking at to make good profits.

The Inflection Point for Defence Stocks is Getting Closer (Profit Hunter)

Oct 9, 2020

Few Indian defence companies could use their engineering capabilities to eventually become global leaders.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Oct 21, 2020 (Close)