“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.