Your Queries – Mutual Funds: Go for mix of debt and equity based on risk appetite, investment horizon

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The significantly low interest rates too present a probability of subdued future returns in case of fixed-income funds, if interest rates move up.

I invest in equity schemes. I am not happy with the returns. Should I move money to debt funds now?
—Name withheld
Equities are the most favoured asset class for wealth generation over the long term, with the potential to deliver superior inflation-adjusted returns compared to fixed-income over the long term. They should form an integral part of an investor’s portfolio subject to his/her risk appetite and time horizon. Equities are more volatile than most asset classes, and returns are not assured as in fixed-rate instruments. Ideally, an asset allocation-based approach (mix of equity and debt) should be followed for investing towards one’s goal. Higher the investment horizon and risk appetite, higher can be the allocation to equities.

Over the trailing 5-, 10- and 15-year periods, equities (S&P BSE 500 TR index) have outperformed fixed-income comfortably delivering annualised returns of 15.04%, 11.22%, and 12.35% (S&P BSE 500 PR index) respectively as of January 21, 2021; while fixed-income ( CCIL All Sovereign TR index) has delivered 10.08%, 9.40% and 8.25% respectively. Since the lows of March 2020, equities have rallied sharply with benchmark indices almost doubling till date (as of January 12, 2021). The sharp rally has resulted in seemingly stretched valuations, which has toned down future return expectations based on a mean-reverting valuation driven asset-allocation approach.

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Over the past two years, sharp rate cuts, abundant liquidity and other support measures announced by RBI have resulted in yields falling, particular-ly at the shorter end of the curve, benefiting fixed-income funds which have delivered wholesome returns. The significantly low interest rates too present a probability of subdued future returns in case of fixed-income funds, if interest rates move up.

Also, fixed-income funds too are prone to the risk of capital loss. Investors should stick to their strategic asset-allocation (SAA) which in turn depends on their risk appetite (ability and willingness to take risk) and not try and time the markets. You should also evaluate performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to

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