Time To Move Money From Equity Mutual Funds To Debt Schemes

The Nifty has been hitting record highs in the last few days, and at 15,600 points is at a new lifetime high. Some mutual fund schemes are simply rocking. In fact, select small scheme funds like SBI Small Cap Fund and Union Small Cap Fund have given 1-year returns of nearly 100%. This simply means that you have doubled your money in schemes like these.

How liquidity is driving markets?

Bulk of the recovery seen in the stock markets over the last 1-year has largely to do with Foreign Portfolio Investors (FPIs). These funds have ample liquidity and the globe is awash with money. Easy monetary policies and low interest rates are driving global stocks higher.

In the US, sovereign bond yields an interest ate of 1.64%, which is negligible. Obviously, FPIs chase returns in emerging markets like India, which drive equities higher. Easing programmes across the world has ensured that we are awash with liquidity.

It's always difficult to predict market movement, as markets dance to liquidity more than fundamentals. However, sometimes it may be a little unwise, if you refuse to take some money off the table.

Markets are over valued

While it will be foolhardy to predict how far liquidity would drive stocks, at times it is a good idea to focus on fundamentals as well. According to one report, the Nifty is trading at a premium of nearly 20% to long term averages. This means that at least some of the Nifty stocks or all are overvalued and if the stocks in the benchmark indices are over valued it is safe to assume that the broader markets are as well. There are reports also coming in, that growth rates for FY 2021-22 are unlikely to be superlative.

Moody's has sounded a risk to credit profile of India. "India's economy rebounded quickly from a steep contraction in 2020, but a severe second wave of the coronavirus has increased risks to the outlook with potential longer-term credit implications. Risks to India's credit profile, including a persistent slowdown in growth, weak government finances and rising financial sector risks, have been exacerbated by the shock," Moody's said.

The sword of a credit downgrade remains. Growth number predictions for FY 2021-22 due to the second wave are not too encouraging either.

Time to switch at least partially to debt funds

We clearly believe that the markets are overvalued and it may be time to book profits by selling equity mutual funds and buying debt mutual funds. We are not advocating that you liquidate your entire equity mutual fund portfolio. At this juncture it would be advisable at least to partially book profits by switching from equity mutual funds to debt mutual funds.

During the course of the year, many mutual funds allow switching a few times. So, if the markets fall, you can switch back to equities mutual funds once again. Of course, debt funds are generating low returns of 5, 6 and 7%, but, at least your capital is protected. Also, there is no harm in switching partially and protecting your capital to an extent.

It is the same case with shares as well, it is not the time to buy shares, but, a good time to sell shares.

About the author

Sunil Fernandes has spent 27 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds and tax planning.