The Indian stock market was on a rollercoaster ride, with the onset of uncertainty triggered by the Russian invasion of Ukraine and the US President Donald Trump’s trade tariffs against countries across the world. This led to a significant shift in investor preferences, with many opting for debt mutual funds over equity schemes, which delivered better returns than expected.
Better Returns than High-Risk Equity Schemes
- Equity mutual fund schemes across all categories delivered a return of 6% last fiscal.
- Debt mutual funds delivered an 8% return (excluding liquid and overnight).
- The one-year return of 9.6% from the Gilt 10Yr Constant Duration fund was higher than all categories of equity funds except for thematic pharma and international funds, which delivered 15% and 9.8% returns, respectively.
Interestingly, the return of 7% and 5% delivered by small and large cap funds were lower than most debt funds. This shift in preference was largely due to the increased uncertainty and volatility in the global market.
A Shift in Investor Preferences
The influx of investors into equity schemes more than doubled last fiscal to ₹4.17 lakh crore against ₹1.84 lakh crore in FY24. In contrast, inflows into debt funds were up last fiscal at ₹1.38 lakh crore against a net outflow of ₹23,098 crore in FY24.
The market was affected by several factors, including the Russian invasion of Ukraine and Israel’s attack on Palestine, which led to a decline in investor confidence. The US President Donald Trump’s levying of trade tariffs against countries across the world further rattled the markets.
Expert Insights
“We always recommend people to follow asset allocation at all times, by keeping Equities, Debt and Gold in their portfolio. Excluding any one would have a direct impact on the portfolio and it will affect negatively at times,” said Sriram BKR, Senior Investment Strategist, Geojit Investments.
“In an environment where global market volatility is sky high, debt funds offer an attractive opportunity to capitalise on lower rates by investing in longer duration products,” said Shriram Ramanathan, CIO, Fixed Income, HSBC Mutual Fund.
“With asset allocations for many investors heavily skewed in favour of riskier asset classes over the past few years, we believe it is an opportune time for investors to set right their medium term asset allocation towards debt mutual funds,” said Shriram Ramanathan.
“With the current market conditions, we recommend that investors consider diversifying their portfolios to include debt mutual funds, which have consistently delivered attractive returns,” said Sriram BKR.
Why Debt Mutual Funds Are a Better Bet
- Debt mutual funds offer a relatively stable returns compared to equity schemes.
- Debt mutual funds have a lower risk profile compared to equity schemes.
- Debt mutual funds provide an opportunity to capitalise on lower interest rates by investing in longer duration products.
| Equity Mutual Fund Schemes | Debt Mutual Fund Schemes |
| Return (last fiscal) | Return (last fiscal) |
| 6% | 8% |
The comparison of returns between equity and debt mutual funds highlights the relatively stable and attractive returns offered by debt mutual funds.
“In a market where uncertainty and volatility are high, debt funds offer an attractive opportunity to capitalise on lower rates by investing in longer duration products. This is especially true for investors who are heavily skewed in favour of riskier asset classes.
“With the current market conditions, we recommend that investors consider diversifying their portfolios to include debt mutual funds, which have consistently delivered attractive returns,” said Sriram BKR.
“We believe that debt mutual funds offer a better bet for investors looking for a relatively stable return with lower risk,” said Shriram Ramanathan.
Conclusion
In conclusion, the uncertainty and volatility in the global market have led to a shift in investor preferences towards debt mutual funds, which have delivered better returns than expected.
