Investing in mutual funds: The stock market is experiencing a significant correction, especially in the small and mid-cap segment, commonly referred to as SMIDs. Many investors who had enjoyed substantial gains in these areas were taken by surprise as prices took a sharp downturn. The BSE Small-cap and Mid-cap Indices have seen notable decreases, with drops of over 6% and 5.3% respectively. This decline has resulted in financial losses for numerous investors who had invested in small and mid-cap stocks.
For instance, the BSE Midcap and Smallcap indices, which had been trading at higher levels earlier in the year, have now suffered considerable decreases in value. This market sell-off has contributed to a broader downturn, heightened volatility, reduced investor confidence, and prompted foreign investors to withdraw their investments.
Data analysed by Value Research shows that as of February 11, the average small-cap fund has declined by more than 13% since the start of the year.
The recent market correction, occurring in under two months, has prompted many investors to feel uncertain about their next steps.
Investing in Debt funds vs equity funds
Following the Reserve Bank of India's repo rate cut of 25 basis points to 6.25%, mutual fund experts suggest that debt mutual funds have become more appealing. They advise investors to gradually increase their allocation to debt, especially in categories that benefit from declining rates, while maintaining a diversified approach to minimise risks and maximise returns.
"The four most popular asset classes are equity, debt, gold, and real estate. Now, these can be categorised into two broad headers based on their behavior. One is growth-based assets like equity and real estate, which focus on stimulating the growth in the portfolio, and the other is conservative assets like debt and commodities, which act as a hedge against volatility and uncertainty. Investing solely in debt would likely result in generating negligible real returns, as debt products will offer returns in the range of 6 to 7%, and inflation will be around 5.9%, so it will unlikely create real returns by beating inflation. Investors should explore this asset class to combine it with growth assets, as it will provide stability in the portfolio," said Amitabh Lara, Executive Director & Unit Head - Mumbai, Anand Rathi Wealth Limited.
Debt funds vs gold
Gold and debt are both considered defensive assets, but they have different functions within a portfolio. Gold serves as a hedge and a tool for diversification, while debt provides stable and reliable returns. Since September 26, 2024, the Sensex has decreased by 11%, whereas gold has maintained a positive return of 13.2%. Conversely, debt funds, such as short-duration funds, have delivered a consistent return of 2.5%.
Gold and debt both serve as defensive assets, yet play distinct roles in a portfolio. Gold acts as a hedge and a diversification tool, while debt ensures drama-free returns, more or less. The Sensex has sunk around 11 per cent since September 26, 2024, gold has kept its nose above at 13.2 per cent. On the other hand, debt funds, like short-duration funds, have offered a modest but steady 2.5 per cent return.
Lara of Anand Rathi Wealth Limited explained in recent years, gold has transformed into a volatile asset, displaying inconsistency in providing stable returns.
"When it comes to gold, gold was turned into a volatile asset in recent years and became very inconsistent in delivering stable returns. Also, if we look at the rolling returns of the gold in the last 5 years, it has delivered 12% returns with a 0.5 efficiency ratio, whereas equity in the same period has delivered 21% returns with a 0.9 efficiency ratio, considering these we don't recommend exploring gold in the portfolio. We recommend only debt as a viable asset for the conservative asset portion in the portfolio," Lamba elaborated.
Where should you invest now?
Lara explained that for short-term investment, investors should invest only in debt funds, while for long term, which is more than 5 years, 80:20 asset mix of equity and debt would do fine.
"Choosing the right asset mix among both depends on metrics such as investor goals, tenure, and liquidity requirements. If an investor invests for short-term goals (5 years) 80:20 asset mix is recommended. Additionally, investing across low-corelative assets will help reduce the volatility of the portfolio in uncertain times. This strategic allocation and diversification helps to maintain growth while ensuring stability and liquidity in the portfolio," Lara said.
Debt funds vs equity funds
Equity mutual funds focus on investing in stocks with the goal of achieving long-term capital appreciation. These funds are particularly suitable for investors who are comfortable with taking on higher levels of risk, given that they are susceptible to fluctuations in the market.
Investing in equity mutual funds offers diversification across a range of stocks, alleviating the necessity for investors to personally invest in individual stocks. This can be an attractive choice for individuals seeking to gain exposure to the stock market while minimising direct exposure to market volatility.
Debt funds primarily invest in fixed-income instruments such as government bonds, corporate bonds, and treasury bills. These funds typically have lower risk levels compared to equity funds, making them a preferred choice for conservative investors.