New Delhi, January 23: When the question on investing in mutual funds crops up, we are at our wits' end whether to invest in debt mutual funds or equity mutual funds. And this consistent doubt hovers around us till we park our money into those avenues. There are two objectives of investing money - capital protection and capital appreciation.
There is no doubt that debt is quite safe in comparison to equity-oriented funds but you could say safety comes at a cost. While in equity funds your money gets good returns, in debt funds the safety of money is ensured. So, simply putting it, if you park your money in debt funds you achieve the objective of capital protection and if you park your money in equity-oriented funds then the objective of capital appreciation is fulfilled.
Debt is the cushion that helps the portfolio to be stable even in the most volatile times. Equity is needed to grow but debt is needed so there is no panic. A portfolio, which has both debt and equity, is important. That is where the role of hybrid funds comes into play. Now, when the question arises about who should invest in what kind of funds, we have to be a little aware. Many experts believe if you want to supplement your family income then you should invest in debt funds as they are more safe with consistent and fixed returns and if you are going to get retired very soon or are already retired, then debt fund is a good option for you, as your risk appetite becomes less over the time.
Historically, hybrid funds with exposure to both equity and debt have shown better results - even better than the share market. Going as per results, hybrid funds in the past have fetched almost double-digit returns. Hybrid funds keep us a little insulated from the bullish and bearish share market. So, hybrid funds have a proven record of performing well even when the share markets are bearish as they have a cushion of debt.
A regularly balanced portfolio of 35 per cent debt and 65 per cent equity over 10 years proves that it is less volatile and gives better returns than a 100 per cent portfolio. The portfolio needs to be re-adjusted periodically, based on certain parameters to ensure a risk-adjusted superior return. When we look back at 2002, the funds invested in government securities fetched double-digit returns like the equity markets. This phenomenon went on until 2004
There is a piece of advice. You should not make your investing decisions on the basis of the market condition. Rather you should make a decision on the basis of your asset allocation strategy.