Equity markets scaled all-time highs in April. The BSE Sensex crossed the 12,000-point mark to close at 12,209 points (up 5.57% over the month); the S&P CNX Nifty appreciated by 3.80% to settle at 3,606 points. The CNX Midcap posted a gain of 5.99% to close at 5,190 points.

Mutual funds were net buyers in equities (Rs 2,688.6 crore), i.e. they purchased more than they sold. However, mutual funds had bought a lot more equities in March 2006 (net purchases Rs 4,480.8 crore). It is not surprising that mutual funds were active buyers in stock markets considering that they still have residual monies from the NFO (new fund offers) blitz we witnessed earlier.

What remains to be seen is whether they will still be adding significantly to their equity investments once the NFO money dries up.

• Who's ruling the stock markets, FIIs or mutual funds?

A stock market rally has a sedative effect on investors. It gives them an impression that any equity-related investment will do the job for them. That's how high risk investments like sector funds and thematic funds make it to their portfolios.

In our view that is not a very smart plan of action, as robust markets do not change a thing about the fundamentals of investing, which is clocking above average return at relatively low risk. Personalfn has short-listed three equity fund categories that work against this principle of investing.

Deutsche Alpha Equity (16.70%) was the leading performer over the month, while Magnum Comma (16.62%) was a close second. Reliance Regular Savings (15.77%) and Sundaram Select Midcap (11.85%) occupied the third and fourth rankings, respectively.

As far as the debt markets were concerned, the most significant development of the month was the announcement of the Monetary Policy. Although, the Reserve Bank of India [Get Quote] did not raise interest rates this time around, we continue to maintain that interest rates are likely to rise going forward.

Debt fund rankings in April show Principal Income (0.98%) scoring over the competition. It was followed by Birla Bond Index (0.92%) and Escorts Income (0.86%).

In the balanced fund rankings, JM Balanced Fund (7.86%) was in the forefront, with PruICICI Balanced (5.71%), a distant second.

An investment that is crying for the investor's attention is the 'humble' balanced fund. In a blistering stock market, there aren't many takers for a fund that has just 2/3rd of its net assets in equities; the popular perception is that it's a lot more rewarding to invest in a 100% equity investment.

We disagree with that view. Balanced funds are distinct from equity funds as they serve a very important investment objective i.e. diversification across asset classes (viz. equity and debt). The fund manager has the flexibility to migrate across asset classes and allocate investments according to opportunities in both equity and debt markets.

Our research team has selected the three best balanced funds for you.

At a time when equity markets are at all-time highs, it gets increasingly important for investors to select their investment options with great care. The risk at these levels is considerably higher and the temptation to invest in a high risk investment to generate some quick money is overwhelming.

We recommend that investors ignore these impulses and continue to invest as they would have when markets were at 3,000 points. Diversification and adhering to your risk appetite are principles that haven't changed one bit even as markets have grown four times.

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