When the equity market trades at a high, it becomes a matter of concern for investors, and some start switching funds from equity to the debt market. Not only retail clients, even FIIs and DIIs start looking for alternatives and switch part of their portfolios into debt.
Currently, bank FDs are not giving very promising returns. All big banks have kept their FD interest rates close to 5.5%, which is almost near the inflation rate. If you are living in an urban area, the inflation rate is quite high i.e. almost 1% higher than the FD rate. So, investing in FD will not protect you against inflation. So what all options do you have as an investor when Sensex, Nifty is nearing lifetime highs? Here are the top three:-
- Gilt Funds: Gilt funds are debt funds that invest in government securities. Since these schemes invest a minimum of 80% in government securities, you remain free of worries about your fund’s security. Gilt funds can give up to 12% returns, the five-year average of Indian gilt funds stands at about 9%. But there is no return guarantee on this product. You also need to consider other factors while investing in gilt funds, such as an average maturity of 3-5 years. And your investment horizon should be in sync with that tenure.
- Corporate Bond Funds: These are another good option of debt investment. These funds invest a minimum of 80% of funds in the highest-rated corporate bonds. Since the funds are lent only to big corporates, which are capable of repaying debt on maturity, they are largely secured. India’s corporate bonds are giving 8-9% returns. So one can also consider this option as part of the portfolio. But such funds do run the usual credit risk and default risk and one should take them be into consideration before investing.
- Gold Funds: The yellow metal has given almost 13% returns in last one year and is expected to do well in the near future as well. However, it is not a debt instrument and its performance depends completely on gold price movement. One should consider gold as part of her portfolio and invest at least 10% of the portfolio value in it, as gold always provides protection against inflation in the long run. There are multiple choices available for investors in gold such as gold funds, sovereign gold bonds and gold ETFs. Sovereign gold bonds have an advantage over other investment tools as they give an additional 2.5% interest to investors apart from gold price performance and they offer a sovereign guarantee as well.
Conclusion: If an investor is fearful about the high levels of the equity indices, then they can invest a part of the portfolio in debt instruments and gold. But one should not withdraw all the money from equity, because it is hard to decide the entry point once you exit the market. Like in a recent case, after the first wave of Covid-19 when Nifty was approaching its previous high 12,000, some investors made an exit from the market, saying Nifty was not performing as per expectations. Yet, the index continuously made new highs, and some of those investors are still not able to re-enter the market and missed a big opportunity. So, one should have a minimum of 40% of their funds in equity all the time, because you never know what could be at the top for the market in a year.
(Ravi Singhal is Vice-Chairman of GCL Securities. Views are his own)
