Is it right to shift your portfolio from equity to debt at this juncture?
It may take years to build trust but minutes to ruin it and that too very easily. This goes true in case of individual investors in India. In early days of development of Indian equity markets, retail investors were apprehensive about investing in equities for a number of reasons. Apart from their inclination to invest in physical assets such as gold and real estate, scams and malpractices are among others factors which kept many retail investors away from equity markets. However things changed in post 'dotcom bubble' era. Tighter regulations, use of much more transparent trading platform and sustained bull market of 2002-07 helped change the mindset of retail investors.
Changing times...
Having reaped rich returns initially, individual investors started putting money regularly in equities, directly as well as through mutual fund route. But, the rude shock of 2008 knocked them off. It was the year in which equity markets not only in India but also elsewhere reached their rock bottom. Investors lost money again. Such repetitive failure in equities made investors believe that equities are risky, less lucrative and best avoided. Many of retail investors had entered the equity market when the last leg of multi-year bull rally was playing out. Even mutual fund houses too had launched a number of equity funds just few months before markets cracked in 2008. Ironically, record inflows to equity oriented funds were witnessed when markets were overpriced and were set for a deep correction. Today, 5 years later, markets are hovering at around levels seen in 2007. So effectively, those who entered the market in 2007-08 have virtually made no returns. At the time of investment, they were perhaps assured by their agents and distributors that over long term (say 3 to 5 years) they would get extremely attractive returns from their investments in equities. In spite of keeping patience for 5 years, they have not made returns. This has put investors off.
And, as a result, delivery based transactions recently hit a 9 year low. The average monthly delivery based transactions has more than halved and has sank to 75 lac in May 2013 against 1.64 crore recorded in 2007-08.
A transaction, wherein you take delivery of shares in your demat account by paying the full price for your purchase, is known as delivery based transaction. These transactions are often referred as cash market transactions. On the other hand, Futures and Options (F&O) segment allows investors to trade in a stock by paying only a fraction of total transaction value. Usually, the cash segment is preferred by long term investors such as mutual funds and other Domestic Institutional Investors (DIIs). Retail and High Net worth Individuals (HNIs) also access cash segment. Falling volume of delivery based transactions implies that participation of retail and HNI investors (through direct or mutual funds) route has fallen.
Changing Trends...
While equities have disappointed investors over the past few years, their investment in fixed deposits and debt oriented mutual funds fetched stable returns. In fact, average returns from debt mutual funds are higher than those generated by S&P BSE Sensex over last 3 to 5 years. As a result, while equity markets saw lower retail and HNI participation, debt funds have witnessed heavy inflows over last 3-4 years. As per AMFI data, proportion of assets belonging to HNIs and retail investors in total Assets under Management (AUM) in debt mutual funds has nearly doubled since 2009. Investors still remain enthused to invest in debt mutual funds on expectation of cuts in policy rates by RBI. There is an inverse relationship between interest rates and bond prices. Debt funds tend to gain when bond prices advance.
We of the view that, investing in any asset class only based on how much returns it has generated in the recent past is a futile activity. Those who are planning to invest in debt oriented funds at this juncture with an aim to play the interest rate cycle and generate equity beating returns may get disappointed. Don't forget, like equity, even debt funds carry risk. As remains the question of timing the interest rate cycle, it is never an easy task. On the other hand, avoiding equity altogether is an equally bad idea. Investors shouldn't expect markets to always trend upwards. Those who are shunning equities based on 3 and 5 year returns should go a little farther in the past. From 1992 to 2002 markets remained flat and generated no meaningful returns but markets rose nearly 7 times in next 5 years. The point here is not that history may repeat, but the point here is that patience pays. We believes that your investment discipline and asset allocation decides your success in investing. A well-crafted financial plan helps you identify monetary value of your goals and lays a roadmap to get there. Your investment decision towards each asset class should be based on your need, suitability, risk taking ability and its potential to deliver over a period of time, rather than changing your preference based on their recent performance.source: personalfn
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