Year 2017 has been a great year for Indian stocks. The Nifty has given nearly 25% returns. While years like 2017 are great for investor sentiment, but equity as an asset class is volatile in nature.
over the last 28 years BSE Sensex has grown at a compounded annual growth rate of over 16% -(1 Lakh investment would be 64 lakhs) But there have been many years where the markets have given negative or below 8% returns. And this is the reason for recommending minimum time horizon of 7+ years when investing in pure equity funds.
Historical data shows that equity is the best performing asset class in the long term, but in the short term equity has been volatile. While the long term India Growth Story remains intact, as evinced by the Moody’s rating upgrade, it will not be unidirectional move for equities; equity prices will move upwards but with volatility.
So where should we invest for short term goals especially when the markets are slightly overvalued.
The easy answer is Debt funds, but there are two issues with this..
The returns are low – 6 to 8% based on the type of fund
The returns are taxable under 3 yrs and are tax efficient only after 3 yrs
The returns on Equity funds are tax effecient post one year. So here are some equity based funds which would be suitable for lower tenure..
Balanced funds (for 4 to 7 yrs tenure) –
These funds have 65% in equity and the rest in debt. The equity exposure gives growth and debt gives stability. While balanced funds have a lower risk profile than equity funds, most balanced funds in India are aggressive in nature because they have minimum 65% exposure to equities to enjoy equity taxation.
Equity Savings funds : (for tenue less than 4 yrs) –
Equity savings funds invest the total corpus in three parts: one-third in debt, one-third in arbitrage and one-third in pure equity. So there is usually less than 35% exposure to pure equity which makes them less-riskier than balanced funds,
While in a Bull Market a balanced fund would give better returns but during a crash or downturn, the equity savings funds are better protected.
Balanced Advantage funds/Asset allocation funds (for tenure less than 7 yrs) –
These funds have dynamic asset allocation strategy determined by equity valuations. Pure Equity allocation can range between 30 – 80% based on the market conditions and valuations. The portfolio is actively managed and when the equity valuations are high, the equity exposure can be reduced to 30% and hence reduces the risk and when the market valuations are reasonable/low…the equity exposure can be increased to 70-80% to generate better returns. The balance of the portfolio is debt and derivatives.
Thank you – Happy Investing.