Returns from equity mutual funds are showing negative returns on an annualized basis for 1 and 2 years, while for 5 years too the returns are very dismal on an annualized basis.
A lot of money has poured into mutual funds over the last few years. Investors may soon begin getting frustrated if returns are not forthcoming.
Should investors move money from equity schemes to debt schemes?
At this juncture it is not advisable to move money into debt schemes. To begin with, investors would be switching at a massive loss, given that markets have fallen near 33 per cent from historic highs. Those who have invested in the last few years are probably looking at a massive loss. At this time it makes sense to actually stay invested and if possible invest even more sums into equity mutual funds.
Apart from this, interest rates have begun falling sharply and it is likely that your returns from debt funds are going to be very poor going ahead. The Reserve Bank of India has recently cut interest rates by a whopping 0.75 per cent and hence interest rates in the economy are likely to fall significantly.
Damage to equities already too sharp
The price destruction in equities has been too sharp and sudden and there is every reason to be optimistic that in the next 2-3 years, we will see significant gains from equities. Hence, at this juncture to dump equity mutual fund schemes, in favour of debt schemes would not be wise.
In fact, those with surplus money should increase their allocation to equity mutual funds, so as to reap the benefits of lower prices.
Individuals are currently invested 100 per cent in debt schemes, could begin by gradually moving at least 50 to 60 per cent into equities over the next few weeks. Having said that, if you are an investors whose age is above 50, then we would advise you not to take the risk and stay in debt. For youngsters, whose holding span can be as much as 10 to 20 years, it makes sense to move into equity mutual fund schemes now.
Over the longer term patience could generate very good returns for equity mutual fund investors.