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Saturday, May 16, 2009

How To Get Best Returns On Investment - With Debt And Equity

At a time when most investors were bracing up for a sharp correction and new lows in the equity markets, the indices across the globe registered a smart recovery in the last 4-5 weeks.

While a clear picture of signs of recovery is yet to emanate from most markets, this recovery has nevertheless given hopes that the future is not so bleak for the markets, at least 12 months down the line.

Despite the relief rally, if you can call it so, it hasn't been convincing enough for investors to rush and put their entire money in equity. After all, many are yet to forget the pains of 2008 and particularly the crash of October 2008.

One of the safe options to manage the current financial dilemma is by allocating your portfolio between equity and debt.

While financial planners have always been suggesting such an allocation for long, it hasn't really percolated down to all class of investors simply because momentum drives the investment decisions for many rather than needs or risk appetite .

The time has probably come for a good balance between the two options.

One of the simpler options is to choose a balanced fund which can allocate as much as 35 percent in debt and the balance in equity or allocate funds individually between debt and equity.

If an individual chooses to strike a balance between debt and equity, he can even go up to 50 percent of the corpus in favour of debt, depending on the market environment.

Unfortunately, there are few who strike a balance and in reality, you find investors chasing one of the options. As a result, while one group ends up with a high-risk allocation , the other group ends up with a low-risk one.

The latter, of course, have their moments of success as was the case in the recent times, but in the long run, miss out on the opportunity of earning higher returns.

For die-hard debt lovers, there may not be much hope in the next 1-2 years as the days of higher rates are clearly behind us.

Those who rely on fixed deposits will probably have to look beyond banks and can park money in company deposits.

In the case of companies, liquidity is still an issue as banks are still taking a cautious approach. As a result, even companies with high credit rating have been forced to face liquidity crunch.

For debt investors some of the other options could be post office monthly income plans, income funds and public provident fund, though income generation on a monthly basis is possible only through post office products.

In this category, monthly income plans of mutual funds can be another option but they carry an element of risk.

If one were to rely on a good mix, a combination of these products along with equity can be the choice besides balanced funds.

In fact, a gradual increase in asset allocation in favour of balanced funds is not a bad idea if you are a mutual fund investor and in the age group of over 50. The advantage with a balanced fund is that during an equity downtrend, it acts as an excellent cushion as debt tends to be a performer during such a scenario.

That is also one of the reasons why balanced funds have managed to cut down their losses in the last 12 months when compared with large-cap focused funds.

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