Questions in the minds of most investors today are related to their investments in debt funds. Is the correction in the debt markets over? Should one continue to remain invested in debt funds? And the like. One other important question investors should be asking themselves is  Should one book profits (partly, ofcourse) in debt funds and switch to equity funds?

Before we give our opinion, here are quotes from the investor newsletters (January 03) of two AMCs, which have performed very well over the last 5 years (all the equity schemes, which have a track record of 5 years, floated by these two fund houses have averaged a five return of over 26% CAGR - Compounded Annual Growth Rate).

Franklin Templeton Investments  While the short-term ride is expected to be bumpy, the long-term story is attractive

Zurich India Mutual Fund -  Indian equities are a good investment opportunity and that returns from this asset category over the next few years are expected to be disproportionately large compared to inherent risk at present prices

And what are AMCs with leading debt schemes in their stable saying about the debt market?

Franklin Templeton Investments  Going forward we are looking at range bound market with softer bias

Zurich India Mutual Fund  ¦ the future returns in bond funds will be moderated compared to returns in the past.

The expectations have been clearly laid out, with little ambiguity. And we are talking about expectations of AMCs that have a track record of delivering consistently for atleast 5 years.

So what should you do now?
Booking profits in debt funds and increasing your exposure to equity funds is one obvious strategy. Though this seems to be a sound strategy, given the expectations from the two markets, investors must tread with great care while embarking on it.

Some pointers that you must keep in mind:

1. Debt funds, from a long-term perspective, are ideal investment instruments for individuals for whom preservation of capital is of prime importance. They will, therefore, still be an integral part of any portfolio.

2. Equity funds, though they may hold a promise of disproportionately high returns, remain relatively riskier investment instruments. Investors with little risk appetite should avoid such instruments and any investment made should be for a minimum tenure of 3 years.

3. Booking profits is a sound strategy. However, the realised funds need not necessarily be invested in a different asset class (equities, in this case). For investors keen on capital preservation, floating rate debt schemes are a better option.

Investors should take a re-look at their portfolios, factoring in the possibility that the kind of returns witnessed in both the debt (very lucrative) and equity (hopelessly negative!) markets over the last couple of years may not sustain. Any realignment should be done keeping in mind the risk profile of the investor. A well planned strategy could set you on course for better than average returns over the next couple of years.

 

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