Your Queries – Mutual Funds: Equities deliver higher inflation-adjusted returns over the long run

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July 29, 2020 1:30 AM

Equities are more volatile than most asset classes, and returns are not assured as is the case with bank FDs, with even a possibility of loss of capital invested.

he allocation to equities should be in line with your risk-appetite and investments can be made through the systematic investment plan (SIP) mode to benefit from rupee cost averaging.The allocation to equities should be in line with your risk-appetite and investments can be made through the systematic investment plan (SIP) mode to benefit from rupee cost averaging.

If I invest in equity mutual funds for 30 years, can I expect to get at least 5% returns?
—Rajesh Thakur
Equities have the potential to deliver superior inflation-adjusted returns compared to fixed income over the long term. Equities are more volatile than most asset classes, and returns are not assured as is the case with bank FDs, with even a possibility of loss of capital invested. However, over longer time horizons, the probability of capital loss diminishes. Over the trailing 10-, 15- and 20-year periods, equities (S&P BSE 500 PR index) has delivered annualised returns of 8.64%, 12.22% and 11.45% respectively. The allocation to equities should be in line with your risk-appetite and investments can be made through the systematic investment plan (SIP) mode to benefit from rupee cost averaging.

I have invested in Aditya Birla Floating Rate Fund- growth option. Is it is a good investment? If I have to keep it for around 3-5 years, what returns can I expect?
—Neville Dhabhar
Floating-rate funds are mandated to invest 65% of their assets in floating rate instruments, and rest in fixed income securities. Coupons on floating rate instruments are often linked to some reference rate and are reset periodically to keep them in sync with market rates. These funds have a modified duration in the range of 1-2 years. Given that the underlying holdings are market-linked, returns cannot be predicted for these funds, although largely floating rate bonds would benefit in a rising interest rate scenario as the coupon would get reset to higher levels when reference rates are moving up. The RBI has signaled a softer interest rate regime which may prevail for sometime. Recently, the yield curve has steepened significantly resulting in attractive term spreads in the medium to long segment relative to the shorter end of the curve. Given your investment horizon of 3-5 years and the attractive term spreads (i.e. the difference in yields of similar rated bonds with different maturities), you can rather consider allocation to short duration, corporate bond and medium duration funds with a high credit quality, which offer potential capital gains from flattening of the yield curve, in addition to a higher yield pickup.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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