Getting into equity because of falling debt mutual fund returns? Think again

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Several investors are betting big on equity schemes because of falling returns from bank deposits and debt investments, say mutual fund advisors. The likely hike in interest rates in early next year may push up deposit rates marginally but it is likely to drag returns from debt funds down, fear these investors. Advisors say though these investors are genuinely worried about their investments, they may be approaching the issue wrongly.

“Many traditional debt investors are getting into equity because debt funds are giving poor returns. They are likely to give poor returns as RBI is likely to tighten rates,” says a mutual fund advisor.

Many money market analysts believe that RBI is likely to start hiking policy rates in the first half of next year. A rate hike is bad news for debt funds, especially long term funds, as higher yields may drag the NAV of funds down.

However, advisors say falling or rising rates alone can’t be the only factor deciding your investment allocation. They say interest rates will go up or down in the economy every few years. This is a variable you should account for while making your investment decision.

Simply put, your equity allocation is determined by your goals and risk appetite. Equity is considered ideal to take care of your long term goals. For example, if you have a goal that needs to be achieved in 10 years, you can use equity schemes to fund it. However, equity is risky. You should ever bet on it to achieve your short term goals.

Advisors point out that some investors have become ‘super confident’ because of the buoyancy in the stock market. “Stock market had a great run despite all predictions in the wake of COVID pandemic. Some investors believe they will get lucky again but it is a risky proposition,” says a financial planner.

Mutual fund advisors say never switch to equity or debt funds based on the market or economic conditions alone. They point out that your goals, horizon, and risk profile also play an important role. Don’t fall for tall claims of some equity schemes that are safe to bet. There are no safe equity schemes. That too, in the short term.

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