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Don't let downturn put you off investing in equities

November 08, 2019 08:30 IST

Those having a high allocation to equities now should maintain it despite the downturn, suggests Sanjay Kumar Singh.

Photograph: Aly Song/Reuters

Equity funds belonging to the National Pension System (NPS) have been able to barely eke out single-digit returns over the past year.

Debt funds, on the other hand, have been the star performers, with many giving returns in the high teens.

 

Returns of tier-1 equity funds range between 2.27 per cent and 7.14 per cent over the past year.

Returns of corporate bond funds have been higher at 13.23-15.44 per cent.

Government bond funds have fared even better, with returns ranging between 19.43 per cent and 22.66 per cent.

The reason? Equity markets have been weak for some time.

While the Sensex has given a compound annual growth rate of 8.84 per cent over the past two years, the broader markets have fared much worse, with the S&P BSE MidCap Index (-6.97 per cent) and the S&P BSE SmallCap Index (-12.27 per cent) correcting sharply over this period.

"Weak domestic economic conditions have affected corporate earnings. So, equity markets have been hit," says Mumbai-based financial planner Arnav Pandya.

He ascribes the blockbuster performance of debt funds to the Reserve Bank of India cutting the repo rate by 135 basis points in 2019.

The 10-year government bond yield has declined from 7.97 per cent a year ago to 6.69 per cent now.

When bond yields fall, their prices rise, and debt funds enjoy capital gains.

Investors should not allow the recent performance to influence their asset allocation decision.

Reducing allocation to equities now would not be a good idea.

"Returns from equities tend to be lumpy. They could give you 30-40 per cent returns one year and negative returns the next year. Take a longer term view when trying to assess the kind of returns equities are capable of giving," says Pandya.

Similarly, investors should not raise their allocation to debt funds based on their recent good run.

Interest-rate movements tend to be cyclical.

The direction of interest rates is also extremely difficult to predict.

"A lot of people have lost money in longer-duration funds (in the mutual fund, or MF, space) because they invested based on high returns in the recent past. That is precisely the wrong time to enter these funds," says Deepesh Raghaw, founder, Personal FinancePlan, a Securities and Exchange Board of India-registered investment advisor.

If interest rates move up (say, if inflation flares up), these funds could be showing negative returns a year from now.

An additional issue within the NPS space is that investors do not have the option to select low-duration debt funds (which do not take duration risk), as they can in MFs.

They can only decide on their allocation to corporate and government bonds and hope that the fund managers will do a good job of managing duration risk.

Decide your asset allocation in NPS based on your goal.

"If your retirement is 20 years away, you can take a 70-75 per cent allocation to equities," says Pandya.

When deciding on equity exposure in NPS, Raghaw suggests keeping in mind what you own in the rest of your portfolio (including MFs), so that your overall equity-debt exposure is in sync with your risk appetite and investment horizon.

Those having a high allocation to equities now should maintain it despite the downturn.

"When the equity markets turn around, the return of your NPS portfolio will improve and you will be able to achieve your goal of retiring comfortably," says Pandya.

Sanjay Kumar Singh in Mumbai
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