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Long-term debt funds offering 15.9% in one year. Does it make sense to shift your equity investments?

Many investors are concerned that their schemes haven’t started offering “decent” returns even after the recent rally in the market, and they are looking for reassurances about their equity mutual fund investments.

ET Online|
Nov 11, 2019, 03.20 PM IST
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Long-term debt mutual fund category is offering more returns than my equity schemes. Should I shift to gilt funds?

Many mutual fund investors, especially the new ones, are asking their advisors the variations of this question these days. According to mutual fund advisors, many investors are concerned that their schemes haven’t started offering “decent” returns even after the recent rally in the market, and they are looking for reassurances about their equity mutual fund investments.

Many experienced investors would have already guessed what the advisors must have told their clients. However, for the benefit of new investors, it is worth going through the arguments against such misadventure once again.

At any point in the market, some asset class would be up, and some others down. For example, currently the debt mutual fund space is offering decent returns. Currently, long duration funds may be offering more returns than all equity mutual funds other than banking sector funds in the one-year horizon. That doesn’t mean that equity mutual funds are going to underperform debt mutual funds forever.

If you look at the long-term performance of equity mutual fund categories, you may notice that most categories have managed to offer double-digit returns over a long period. Debt mutual funds match that over a long period. Of course, there will be periods, especially when the interest rates are falling in the economy, debt mutual funds would offer double-digit returns. However, they normally cannot sustain it over a long period.

There are countless studies that prove that equity has the potential to beat all other asset classes over a long period. This is the reason why most mutual fund advisors recommend equity mutual funds to achieve long-term financial goals. In fact, equity is the only asset class that can offer inflation-beating returns over a long period – and beating inflation is crucial to build a sizeable corpus over a long period.

Coming back to the question, since it is not possible for an asset class to perform better all the time, it is quite futile to chase the better-performing asset class. For example, long term debt funds are benefitting from the easy interest rate regime that many money market participants believe would stay for some more time. However, these schemes would suffer badly when the tide turns – that is when the RBI starts hiking rates.

As for the prospects of equity mutual fund schemes, as you know the current rally is led by ample liquidity in the system that is chasing select stocks. However, a broad-based rally would be possible only when the economic outlook changes and once again companies start doing well. Till that time, your equity mutual fund schemes are likely to stay subdued.

However, do not make the mistake of discontinuing your equity mutual funds during the bad phase. Remember, a lean phase helps you to buy more units or stocks cheaply. And that would help you to maximise your wealth over a long period.

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The difficulties of managing debt funds in India

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