Debt is not dead in the New Year even though pundits are reducing their interest rate cut expectations.
Investment advisors advise against moving a big chunk of assets to equities because risk would increase and capital could get eroded when earnings growth is unlikely to be in double digits. Instead, investors may get near double-digit returns from select mutual funds, including dynamic bond funds, income funds and gilt funds.
“Unless there is a change-in-life situation, it does not make any sense to significantly change your asset allocations, which are set assessing investor risk appetite,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories in Mumbai. “Despite falling deposit rates, there are enough debt mutual fund schemes, which can easily fetch you about 200-400 basis points higher returns with almost similar safety nets (as fixed deposits).”
A change-in-life situation is one that results in a sudden rise or fall that results in a sudden rise or fall in income, including a windfall gain or loss.
A moderate risk investor should ideally allocate funds equally between equities and debt. In the New Year, equity allocations could be increased to 55% on the back of falling interest rates. However, an aggressive bet on equity could be counterproductive as debt and equity are fundamentally different asset classes serving diversified investment objectives.
In the past year, the benchmark bond yield has dipped about 125 basis points, pushing prices up. This has helped some mutual fund schemes to reward investors. Dynamic bond funds have yielded as much as 13.4%, while income funds have returned 11.8% on average, according to data from Value Research, a mutual fund analytics company .
“There is still some shine left in duration play in debt markets as the benchmark yield is expected to fall by another 50-75 bps, giving room for capital appreciation,” said Satya Narayan Bansal, CEO of Wealth Management – India at Barclays. “Such an opportunity may not be there 12-18 months down the line. This time around, it is not real estate but equities seen as growth assets.”
The government’s demonetisation has triggered short-term sluggishness in the economy, which in turn, could stem gains in the stock market.
Mutual fund schemes, too, will deliver less than what they did in 2016. Investors should moderate their return expectations as retail inflation eases. “Investors should remain invested in short-duration funds, which will protect any erosion in investments,” said Dhawal Dalal, CIO – fixed income at Edelweiss Mutual Fund. “We are cautiously optimistic on the bond market in the first half of the year amid global uncertainties. Investors should wait for better opportunities in the coming months instead of making any hurried decision.”
During the past year, returns on liquid, ultra short-term and short-term funds have ranged between 7.5% and 9.8%. These returns are higher than traditional bank fixed deposit rates, which would dip further.