Investing in mutual
funds through a Systematic Investment Plan (SIP) is a favored strategy among
investors aiming to build wealth gradually. While the allure of
"risk-free" investments is strong, it's vital to understand that all
mutual funds come with varying degrees of risk. However, there are certain
mutual funds that are relatively low-risk and can be considered safer for
investors who prefer conservative investment avenues for their monthly SIPs.
Understanding risk in
mutual funds
Mutual funds pool
money from numerous investors to create a diversified portfolio of stocks,
bonds, or other securities. The risk level of a mutual fund is primarily
determined by the nature of its underlying assets:
Equity funds: These invest mainly in stocks and are
considered high-risk due to market volatility.
Debt funds: These invest in fixed-income securities like
bonds and are generally lower-risk compared to equity funds.
Hybrid funds: These combine equity and debt investments,
balancing risk and return.
Liquid funds: These invest in very short-term debt
instruments, offering low risk and high liquidity.
Index funds: These track a specific market index, with the
risk level depending on the index they follow.
For investors seeking low-risk options, debt funds and
liquid funds are typically the safest bets.
Low-risk mutual fund
categories
Liquid funds:
Overview: These funds invest in short-term money market
instruments such as Treasury bills, commercial papers, and certificates of
deposit. They are considered the safest among mutual funds.
Risk level: Low, as they invest in high-credit-rating
instruments with short maturities.
Returns: Typically offer returns slightly higher than a
savings account or fixed deposit.
Ideal for: Parking surplus funds for short durations and
maintaining liquidity.
Ultra short duration
funds:
Overview: These funds invest in instruments with
slightly longer durations than liquid funds, usually between 3 to 6 months.
Risk level: Low to moderate, with slightly higher interest
rate risk compared to liquid funds.
Returns: Can offer better returns than liquid funds but
with a bit more volatility.
Ideal for: Investors seeking better returns than liquid
funds while still maintaining low risk.
Short duration funds:
Overview: These funds invest in debt securities with
maturities between 1 to 3 years.
Risk level: Moderate, as they are subject to interest rate
risk and credit risk.
Returns: Generally higher than ultra short duration
funds and liquid funds, but with more volatility.
Ideal for: Investors with a short to medium-term
investment horizon who can tolerate slight fluctuations in their investment
value.
Banking and PSU debt
funds:
Overview: These funds invest in debt instruments issued
by banks, public sector undertakings (PSUs), and public financial institutions.
Risk level: Low to moderate, as they invest in
high-quality debt instruments with low credit risk.
Returns: Typically offer steady returns with lower risk
of default.
Ideal for: Conservative investors seeking stability and
reasonable returns.
Overnight funds:
Overview: These funds invest in overnight securities,
which have a maturity of one day.
Risk level: Very low, as the investment period is just one
day.
Returns: Similar to liquid funds, often used for
parking very short-term surplus funds.
Ideal for: Investors who need to park funds for an
extremely short duration with minimal risk.
Benefits of low-risk
mutual funds for SIPs
Capital preservation:
These funds prioritize preserving your
capital while generating modest returns.
Steady returns: They offer more predictable returns compared
to equity funds.
Lower volatility:
The value of your investment is less
likely to fluctuate wildly.
Liquidity: Many low-risk funds provide high liquidity,
allowing easy access to your money when needed.
Suitable for
conservative investors: Ideal for
those who prioritize safety over high returns.
Steps to invest in
low-risk mutual funds via SIP
Define your
investment goals: Understand your
financial goals, investment horizon, and risk tolerance.
Select the right fund:
Research various low-risk mutual funds
and compare their performance, expense ratio, and portfolio composition.
Start the SIP: Choose the SIP amount and frequency (monthly
is common). Many fund houses allow you to set up SIPs online.
Monitor your investments:
Regularly review your investment
portfolio to ensure it aligns with your goals. Make adjustments if necessary.
How to evaluate
low-risk mutual funds
Credit quality: Ensure the fund invests in high-quality
securities. Funds investing in instruments with higher credit ratings are
generally safer.
Interest rate risk:
Assess the fund’s sensitivity to
interest rate changes. Shorter duration funds tend to be less affected by
interest rate fluctuations.
Fund manager's track
record: A fund manager's experience
and past performance can provide insights into how the fund is likely to
perform in different market conditions.
Expense ratio: Lower expense ratios can enhance net returns,
making it an important factor to consider.
Liquidity: Evaluate how quickly and easily you can redeem
your investments.
Example funds to consider
Liquid funds:
HDFC Liquid Fund
ICICI Prudential Liquid Fund
SBI Liquid Fund
Ultra Short Duration Funds:
Aditya Birla Sun Life Savings Fund
Kotak Savings Fund
Axis Ultra Short Term Fund
Short Duration Funds:
Franklin India Short Term Income Plan
ICICI Prudential Short Term Fund
Nippon India Short Term Fund
Banking and PSU Debt Funds:
SBI Banking & PSU Fund
HDFC Banking and PSU Debt Fund
Axis Banking & PSU Debt Fund
Overnight Funds:
ICICI Prudential Overnight Fund
HDFC Overnight Fund
Aditya Birla Sun Life Overnight Fund
Case Study: Low-Risk SIP Investment Strategy
Let's consider an
investor, Raj, who wants to start a monthly SIP with a focus on low-risk
investments. His primary goal is capital preservation with steady returns to
support his medium-term financial goals, such as funding his child's education
in 5 years.
Investment Goals: Raj needs a safe investment option that
can offer liquidity and steady returns over the next 5 years.
Fund Selection: After
researching, Raj selects the following funds:
40% in HDFC Liquid Fund for high liquidity and safety.
30% in ICICI Prudential Short Term Fund for slightly higher
returns with moderate risk.
30% in SBI Banking & PSU Fund for stability and
reasonable returns.
SIP setup: Raj sets up a monthly SIP of ₹10,000 divided
among the chosen funds according to the above allocation.
Monitoring: Raj reviews his investment portfolio every six
months to ensure it continues to align with his goals and makes adjustments if
necessary.
Conclusion
While no mutual
fund can be entirely risk-free, certain types of funds offer a safer investment
option for those seeking low-risk avenues for their monthly SIPs. Liquid funds,
ultra short duration funds, short duration funds, banking and PSU debt funds,
and overnight funds are among the most suitable choices for conservative
investors. These funds provide a balance of safety, liquidity, and reasonable
returns, making them ideal for those who prefer steady growth with minimal
risk.
As always, it's
crucial to perform thorough research and consider consulting with a financial
advisor to tailor your investment strategy to your specific financial goals and
risk tolerance. By carefully selecting the right low-risk mutual funds and
regularly monitoring your investments, you can build a stable and secure
financial future through SIPs.
No comments:
Post a Comment