Maximizing Equity and Debt MFs

Posted On Monday, Nov 24, 2014


Ask a layman where he would invest a crore, if he wins it on a famous show, pat comes the answer - in real estate, balance ka dekhenge, FD khol denge, or jewllery for the better half... Mutual Funds, seemingly, do not enter the consideration set.

Not really surprising since only 1.80%* savings of Indian households is invested in mutual funds. This is an abysmally low number since mutual funds are great products to invest in and we have funds that cater to all asset classes of equity, debt and gold. This unwarranted aversion to mutual funds is somewhat understandable since many investors burnt their fingers with mutual funds. The 2008 crash saw a severe erosion of wealth for many. Not any fault of their own, but the result of mis-selling that has led to the mistrust in the minds of the investor – not only for mutual funds - but even for stock markets.

Unfortunately, people tend to forget the old investment adage “Higher the risk, higher the gain”. Yes there is a risk in investing in stock markets. However, since the beginning of the S&P BSE Sensex in the year 1979 till date, the markets have given around 17% returns. (Source - Bloomberg). While a majority of investors (given their past experience) were shying away from equity funds, the equity markets were soaring to new highs (28,000 mark breached by the Sensex just last week). On hindsight now investors could be ruing the opportunities missed.

However to invest in equities requires a lot of time, patience and expertise as to not only which stock to buy, but also how much to buy, when to sell etc; here is where mutual funds step in. Professional fund managers manage investors’ money and invest in stocks after thorough research. However I always recommend that an investor should do some homework before choosing the equity fund – what is the fund’s track record, in good times and bad, what is the philosophy of the fund, the expense ratios, who is the fund manager etc. Once this is known then the investor should have an investment in equities at all times (depending upon age profile and risk appetite).

Coming to debt, debt funds seem to have become a place for large corporates to park excess money rather than for the retail investors. As on 31st October 2014, 63% of the assets under management of the industry were in debt/liquid funds (source – ACE MF) – a massively skewed number considering that mutual funds came into being to mobilize retail money thus becoming a pool for retail investors to benefit from investing in various markets! Anyway, there are avenues for the retail investor to invest too, apart from FD’s. Retail investors can invest in Liquid funds where they can park their excess money for a short period of time. Units can be easily redeemed making it very easy to enter and exit from the investment (hence the name liquid funds!).

In my view a disciplined mutual fund investor should have a balanced portfolio of different asset classes. The allocation of asset class (click here for our asset allocator calculator) can be decided or determined by the age of the investor, his risk bearing capacity and the term of the investment. Ideally when one is young, exposure to equities should be high (for example - 80% equity, 10% debt and 10% gold), as age and responsibilities increase – reduce exposure to equities, increase debt. Thus at retirement one should ideally have maximum exposure to debt (for example 10% equity, 80% debt and 10% gold). Some allocation to gold is good at all times since gold is a great portfolio diversifier. However this is totally dependent on the risk taking ability and the age of the investor. I also strongly recommend that an investor should have a good financial advisor to guide him/her.

*Source: RBI Annual Report 2013-14

Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

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