'Equity returns spectacular, but you cannot ignore...': Edelweiss Mutual Fund's Radhika Gupta

In the realm of mutual fund investments, equities remain the preferred choice due to their potential for high returns. According to data released by the Association for Mutual Funds in India (AMFI), equity mutual fund inflows in November 2024 amounted to Rs 35,927.3 crore. This figure represented a 14.1% decrease from the previous month when inflows stood at Rs 41,865.4 crore in October.

October had witnessed a significant surge in equity mutual fund inflows, with a month-on-month increase of 21.69% to reach Rs 41,887 crore. Open-ended equity funds continued their positive performance streak for the 44th consecutive month, contributing to the overall growth in the sector. Demand for all three segments—small-cap, mid-cap, and large-cap funds—was robust during the month.

Large-cap funds experienced a substantial increase in inflows, rising to Rs 3,452 crore. Meanwhile, mid-cap funds saw a 50% jump in net investments, totaling Rs 4,683 crore, and small-cap funds attracted Rs 3,772 crore with a 23% increase in inflow. The trend in equity mutual funds highlights the enduring appeal of equities as a lucrative investment option in the market.

Nevertheless, in the midst of the stock market's volatility, it is important not to underestimate the consistent and dependable performance of fixed-income mutual funds. Even as equity MFs gain popularity, the underappreciated potential of fixed-income MFs makes them a crucial component of a diversified investment portfolio.

Talking about market volatility and mutual fund investment, Radhika Gupta, MD & CEO of Edelweiss Mutual Fund, noted that while equity returns have been impressive, investors must not ignore the stability fixed-income MFs provide.

In a post on X, Gupta stated: "Equity returns have been spectacular, but you still cannot ignore fixed income. I write a few thoughts."

According to Gupta, these funds serve as a counterbalance to equities, providing decreased volatility and more consistent returns, which are essential for strategic financial planning in the long term. Gupta added a varied portfolio comprising both equity and fixed-income assets to mitigate risks and ensure steady performance.

A fixed-income mutual fund can be defined as investment vehicle that primarily puts money into assets such as government securities, corporate bonds, debentures, and other money market instruments. The main objective of these funds is to provide investors with a steady income stream through regular interest payments from the securities held in the fund's portfolio. They are commonly known as debt funds.

Gupta emphasized the distinct advantages of fixed-income mutual funds compared to traditional fixed deposits (FDs) in aiding investors reach their financial objectives, despite certain associated risks. 

Why Fixed Income finds have an edge over others

Enhanced liquidity and flexibility: Fixed-income mutual funds (MFs) offer the advantage of allowing partial withdrawals without penalties, unlike fixed deposits (FDs) which may incur fees and reduce returns if withdrawn early. This flexibility enables investors to effectively manage short-term cash flow needs without compromising long-term growth objectives.

Tax efficiency: Fixed-income MFs provide deferred taxation, meaning taxes are only imposed upon the redemption of the investment. This structure allows for compounding returns over time, contrasting with FDs where taxes are levied annually on interest earnings.

Steady and tailored cash flows: Fixed-income MFs offer systematic withdrawal plans (SWPs) that can be customized to meet individual requirements. These SWPs can establish a consistent income stream while also minimizing overall tax liabilities due to their tax-efficient nature.

Potential for higher returns: In a declining interest rate environment, fixed-income MFs can capitalize on bond price movements, potentially delivering greater returns compared to traditional FDs.

Dal-chawal funds and market volatility

In the past, Gupta advocated for a disciplined, long-term investing approach, which she coined as "Dal-Chawal Investing." She recommended that investors stick to a simple, core investment strategy to navigate the market's fluctuations.

According to Gupta, it is crucial for 80% of one's portfolio to consist of "dal chawal," representing low-risk, reliable investments that can support sustainable growth over time.

Conversely, she cautioned against heavily relying on what she called “pickle and chutney funds” — high-risk investments that may add excitement but could lead to financial difficulties if overused.

Gupta stressed the significance of diversified funds in the current market landscape, emphasizing the risks associated with investing heavily in narrowly focused sectoral funds.

She suggested considering various fund options, such as hybrid funds, diversified equity funds, and other broad-based investments, both active and passive, to enhance one's portfolio.