1. Mutual funds: How to hedge your bets by investing in debt funds

Mutual funds: How to hedge your bets by investing in debt funds

The stock markets have been on a roll until the last month or so, when a multitude of voices began asking whether such a sharp rise was warranted. In such markets, most of us go through emotional swings and have a tendency to jump from one strategy to another.

Published: July 14, 2017 3:54 AM
mutual funds, debt funds, debt funds news, personal finance, personal finance news, personal finance latest news Asset allocation is the key to achieving healthy long-term returns.

The stock markets have been on a roll until the last month or so, when a multitude of voices began asking whether such a sharp rise was warranted. In such markets, most of us go through emotional swings and have a tendency to jump from one strategy to another.  To this we say: Keep your long-term investment goal in mind, ensure you have a proper asset allocation of your funds and you don’t have to worry. Strategy comes later; first you need to do asset allocation wisely. The great part is that it’s a lot simpler to implement than it sounds—the hard part is avoiding the itch to drastically change that long-term allocation with every move in the market.

Asset allocation?

Asset allocation is the key to achieving healthy long-term returns. It refers to how you split your investments across different asset classes (equity, debt, cash/fixed deposits, gold, real estate being the main ones) based on your individual preferences, goals and risk profile. Through simple diversification, asset allocation helps in limiting risks and reducing the volatility of returns.

Before investing in any asset class, you should determine your financial goals and check your liabilities. Make sure you have enough in regular income or extra cash set aside to comfortably pay off those liabilities over a reasonable time frame. Debt doesn’t have to be a bad word and the key is not to overdo it. Some level of debt is totally fine —if you can borrow at 8% but earn 12% or more over the long term, then you don’t need to panic and pay down every last rupee of debt as fast as you can (though admittedly the psychological freedom of being debt-free is worth something!). If you approach it responsibly and don’t overextend yourself, you can quite easily construct a long-term allocation plan that allows you to take on a few manageable liabilities here and there and be comfortable.

That leads us to our next point: it can be fruitful to be on the receiving end of those interest payments by investing in debt, too!

Many investors have mismatched their risk appetite to their asset allocation, either due to inattention or inertia over time—or being downright afraid to pull the trigger on an allocation change. A simple rule of thumb is to subtract your age from 100 and use that as your equity allocation. (So a 20 year-old would have around 80% in equities, while a 60 year-old would be more appropriate at 40% equities.) Managing around those levels ought to serve you well over the long term.

Your asset allocation may deviate from your target in situations like the present, in which the stock market continues to hover near all-time highs. Uncertainties abound and you may not want to redeem your current funds. Meanwhile, you’re not sure you want to plow all your extra monthly savings into more equity investments, but then again you don’t want to miss out on capitalising on future earnings growth.

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In times like this, a balanced fund makes a lot of sense. But it’s imperative to make sure you know what you want – an equity-oriented balanced fund may not really reduce that much risk for you, as it’s required to still keep 65% in equities. Sure, there are tax benefits to that, but the actual benefit pales in comparison to the added risk you could be taking by having 70% or 80% in equities— remember, 65% is a minimum for those funds, not a maximum – when your actual allocation should be 40% or 50%.

—Quantum Mutual Fund

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