#BQMutualFundShow: ‘Strike A Balance Between Equity And Debt’

It is not an equity versus bond story. If you look at one particular period, with a starting base in 2007, which was a peak for the market and you take the same chart with a base of 2009, then you will get a very different return. The fact is, for certain periods, equities do substantially better and there are certain periods when bonds do substantially better.

Absolutely and this is less understood by many investors. For most investors, especially retail investors, mutual fund means equity. Data shows that over 70 percent of retail investors' money in mutual funds is in equity funds. That is at contrast to asset performance. It is widely believed that if 70 percent of the money going into one asset class, it must be the best performing asset class. But if a debt or a balanced portfolio can deliver the same returns with much lower risk then we should look at those funds as well in the mutual fund basket.

If you are in an actively managed equity fund, then obviously you expect it to beat the benchmark. If you are an actively managed debt fund, then you expect to beat that benchmark. So, there is alpha to be obtained in both asset classes. We are also looking at an index like the Nifty which is the ultra-large cap, and if you go into mid caps which have done really well then you will see that mid caps have actually outperformed fixed income. It is not this versus that. If you choose your funds carefully, you can get much superior returns even in equity.

Yes. Markets are ahead of us. It is very difficult to time the market at any given point of time. Would you be investing if there is a 5 percent correction? Then your psychology will say that let it correct by 10 percent. Because we don't know how events unfold. At any given point, if you take a 3-10 year view, then your market has continuously delivered in terms of returns. There might be a correction which is better for investing more into schemes (wherever you are investing), but it is difficult to time the market. It is better to invest in the stories that you like and have done due diligence rather than trying to take a broader view on the market. Suppose the markets are up by 5 percent then what you will do? Don't time the market.

At the end of the day, if the economy and companies are doing well, it will get reflected in terms of valuations and growth. You have to be disciplined in doing SIPs or lump-sum investments depending on your risk appetite. At some point, you could go into a debt or equity as per your needs. Just like while you are eating a thali, you would want rice, dal and multiple things to keep you fit. So, as a financial goal, you should balance your investments.

Even in a balanced fund, you have had a lot of innovation in mutual funds over the last few years. You have simple balanced funds where you have an X allocation in equity and the rest is in fixed income, which was very simple. Now, we have dynamic strategies which allocate between equity and debt depending on valuations and other parameters. These strategies try to give a value added return. When one asset class is outperforming versus another, can we not use that outperformance? A trading strategy which buys low and sells high can be part of an asset allocation strategy. If we can create such funds in the market, they can give a decent allocation to equity but can also act as a buffer. During tough times, they have much lower equity allocation. Risk adjustment return is managing your risk and return. Over a period of time, we have seen that the average compounding return is similar between debt and equity. In between, we have volatile periods where one or the other asset class is outperforming or under performing. The key lies in ways to capture the alpha from it. There are fantastic opportunities in the mutual fund space which have dynamic allocation strategies which is an interesting place to look at.