Sandeep Kumar of Amritsar is bullish on stocks and feels the prices can't fall any lower. But he is surprised MONEY TODAY is advising investors to consider gilt and other debt funds. Here's why:
| BEST GILT FUNDS | ||||
|---|---|---|---|---|
| Scheme | NAV (Rs) | 3 mth (%) | 6 mth (%) | 1 yr (%) |
| ICICI Pru Gilt Fund | 32.50 | 27.18 | 34.80 | 33.31 |
| JM G-Sec Fund | 28.97 | 20.10 | 31.37 | 32.59 |
| UTI-Gilt Advantage Fund | 20.68 | 24.27 | 29.93 | 28.68 |
| Escorts Gilt Fund | 20.61 | 21.65 | 28.67 | 33.73 |
| DSP BR G-Sec Fund | 31.42 | 22.80 | 27.88 | 28.36 |
| Category Average | 13.90 | 14.88 | 17.22 | |
| Figures are returns as on Dec 26, 2008 | ||||
| BEST BALANCED FUNDS | ||||
| Scheme | NAV (Rs) | 6 mth (%) | 1 yr (%) | 3 yr (%) |
| Principal Child Benefit | 49.30 | -30.80 | -44.33 | 8.18 |
| DSP BR Balanced | 35.42 | -19.42 | -38.56 | 7.38 |
| Canara Robeco Balance | 32.00 | -14.64 | -40.12 | 5.43 |
| Tata Balanced | 28.77 | -21.42 | -45.11 | 4.91 |
| Birla Sun Life Balance | 25.44 | -10.49 | -30.45 | 4.78 |
| Category Average | -20.01 | -41.46 | 1.76 | |
| Figures are returns as on December 26, 2008. Three-year returns are annualised. | ||||
We agree that the stock markets are at an attractive low, but no one can say with certainty whether this is the lowest they will fall. The suddenness and severity of the stock crash in 2008 took everybody by surprise. Within a few months, stock prices fell to three-year low levels, wiping out the gains made since 2005. Many investors still refuse to believe that they are in the middle of a bear market and continue to cling to hopes of a quick revival.
MONEY TODAY believes that there will indeed be an economic revival and the stock market will move up once again. But we also think that the upturn and a sustainable upward move will not happen immediately and is bound to play itself out over the long term.
That is why it is better to keep investing small amounts in the stock market through systematic investment plans (SIPs) in stable and well-performing mutual funds. The longer the stock markets take to revive, the better it will be for the SIP investor because he will be able to invest more when the prices are low.
On the other hand, interest rates seem to have peaked out now. While completely risk-averse investors can go in for bank fixed deposits and FMPs to earn about 9-10% return per annum, others can opt for low-risk debt funds such as gilt funds and bond funds. These funds bought sovereign bonds and debt instruments when the interest rates were very high during the past six to eight months. Now, as the interest rates go down, the value of these bonds and corporate deposits of high coupon rates will shoot up in the debt market. This, in turn, will cause the NAVs of these funds to move up. In fact, some gilt funds have given returns of up to 30% in the past six months (see table).
Investment is not about putting your money in either debt or equities. Your asset allocation should be based on your overall investment strategy. So, do not be tempted to change your asset allocation drastically just because a certain asset class is expected to give very high returns in the short term.
This is where balanced funds come into the picture. By investing in a combination of equities and debt, these funds offer the best of both worlds in the current situation. They may not offer the spectacular returns of an equity fund, but they also do not fall as hard. What's more, the profits earned from a balanced fund receive the same tax treatment as an equity fund if the fund invests more than 65% of its corpus in equities. This means 15% tax on short-term capital gains and no tax on long-term capital gains.
This is an interactive section for investors. Do you have a query regarding your investments? Write to us at letters.moneytoday@intoday.com and we will give a detailed answer.
