It has been a rough ride for both equities and debt investments this year.
In last two months alone, benchmark equity indices Sensex & Nifty both are down over nine per cent each, and have seen a six per cent cut year-to-date. The broader markets–BSE Midcap and BSE Smallcap indices – both have seen deep corrections of 11 per cent and 13 per cent, in just last two months.
On the other hand, the bond yield had been hardening in anticipation of a hawkish RBI, as it moves to rein in runaway prices. The yield on domestic 10-year G-Sec paper, seen as a benchmark in bond markets, has gone up by around 40 basis points since the start of May.
So, how does this churn impact your investments? Kalpen Parekh, the Managing Director and Chief Executive Officer of DSP Mutual Fund shared his advice for investors. Here’s the interaction:
Where should investors put their money?
Investors should look at investment options that can see them through different market cycles. You need asset allocation to achieve risk-adjusted returns over long-term.
Investors can use dynamic asset allocation funds for this. When stock markets are less expensive, these funds increase exposure to stocks and when stock markets are expensive, these funds increase exposure to bonds.
The exposures are automatically adjusted between equity and debt, which investors may not be able to do on their own, in a disciplined manner. Investors can either look at dynamic asset allocation or even hybrid funds with static 70 per cent equity and 30 per cent debt allocations.
Once in a few years, there will be a period when business cycle is at an all-time low and that is also reflected in stock prices falling to all-time lows. Generally, such periods don’t last for very long. For example, the 2008-09 crisis, the 2012-13 slowdown, the 2020 period right after the Covid-19 outbreak. These are periods when we saw sharp corrections and future looked uncertain, but these are also the times when investors can consider increasing equity exposure.
Otherwise, investors should look at asset allocation funds.
The fixed income part in asset allocation funds are usually around 60 per cent. Of this, around 25 per cent are in arbitrage strategy.
Most of the fixed income corpus is in lower maturity bonds, where the interest rate risk is low. Such bonds have low-sensitivity to rising interest rates. Rising interest rates are actually beneficial for such bonds, as this would mean these bonds mature faster and funds get re-invested at higher rates.
In our hybrid funds at DSP MF, we keep bonds exposure in low-maturity bonds. When rates rise, we move to short-to-medium-term maturity. Asset allocation funds actively manage debt, equity and the split between these two asset classes.
Apart from equity and debt, which are the other asset classes investors can consider?
It is good to look at investing in commodities, when commodity prices are low. Right now, commodity prices have shot up. Profits of commodity companies have gone up. However, gold has not done so well in recent times, so one can add exposure to gold.
What is the split of your own personal investments?
My mutual fund investments are done through DSP MF schemes. I have 40 per cent of my investments in Indian equities, 20 per cent in global equities, 30 per cent in short-term debt and 10 per cent in gold fund and gold bonds.
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