“Investors should not ignore debt funds despite lower short-term returns,” said S Naren, CIO, ICICI Prudential Mutual Fund. Within debt schemes, he advocates short-term and dynamic bond and medium-term funds.
The annualized returns of the debt program categories have declined to 3% to 6% in line with the decline in fixed deposit rates. In comparison, the benchmark Nifty50 returned 62%, while the Nifty Next 50 has risen 66% over the past year. Gold prices have fallen 8.6% in the past year.
An HDFC MF study shows that in 24 years since FY99, equities have been the best performing asset class in 12 years. Debt and Gold were the best performing asset classes in 5 and 7 years, respectively, highlighting the importance of adding debt and gold to the portfolio.
“At this point, investors should have 25-30% debt and 5-10% gold with the balance in stocks,” said Nirav Karkera, head of research at Fisdom.
Investor money has flowed into stocks through IPOs, secondary market purchases and mutual funds, spurred by the one-way rise in stocks over the past 18 months. As stocks rose, gold lost its luster and bond yields were weak.
While it’s okay for investors to look for past performance and allocate money to the asset class that has performed high while ignoring the rest, fund managers say it’s important to also consider debt and gold in portfolios, especially with stretched valuations and markets at all-time highs.
“Most of the investors who started investing after April 2020 are new to investing in stocks and have never seen a market correction so far,” Naren said. He believes that novice investors ignore the valuation of the stock markets and see it as a risk related to investor sentiment rather than a risk related to the economic cycle.
“The optimal approach to investing is to follow asset allocation: invest in stocks, debt, cash, gold and real estate in a reasonable way. Don’t focus all of your investments just on stocks. Debt also has an important role in his portfolio, ”he said.
Many investors are in favor of getting into debt because of the higher taxes as well. Naren said these people might consider arbitrage funds or stock savings funds that have a small proportion of stocks in the portfolio.