For retail investors, equity is still a better bet than fixed income: Dhirendra Kumar


A negative return on fixed income can be devastating, says Dhirendra Kumar, CEO of Value Research. Which means investors should err on the side of caution, he tells ETNow.

Edited excerpts:

ETNow: Is it time now to rebalance your portfolios, allocate more towards fixed income and may be eat out of equity?

Dhirendra Kumar: The reasons why investor should be investing in fixed income are primarily two. One is the money you are likely to need in 2-3 years should be in fixed income and for a non negotiable goal you should not take any chances with. So, your emergency money, money to be consumed in foreseeable immediate future should be in fixed income. That is not dependent on any circumstances.

And when it comes to rebalancing, every investor should have a fixed income allocation. If you do not have a fixed income allocation, how will you rebalance? And if your allocation has gone whacky, you should definitely rebalance and there is a possibility that the way equity has behaved in the last 6-8 months, there could be a reason why you should not be investing in fixed income but moving your money from fixed income to equity.

And also, I would like to give some framework in terms of which fixed income has been giving more surprises than equity. We know equity is volatile, it can go up and down. We take a long-term view, but when it comes to fixed income, most investors still think it works in a band. It has been giving surprises over the last 4-5 years, things change with fixed income when we least expect it. So, do not take chances with that.

The dynamic bond fund and the gilt fund have all given negative surprises to investors. We like positive surprises if we were expecting something and something else happens which has been profitable no longer. It has been extremely disappointing. So, investors should err on the side of caution when it comes to fixed income. They should look no further than liquid fund, ultra short term bond fund and short term fund.

The reason why I say this is because the payoff of fixed income even if you make a great call is not going to make a material difference depending on the scale of investment. It is not going to make a material difference to your net worth. But if you get a negative return, it is devastating, it is something which is generally not expected, it is disproportionately disappointing.

ETNow: All you are saying is that if you are looking at fixed income, go for that extremely short term narrow window best suited for short term bond funds or for that matter liquid funds. Look no further than that. If someone has a long term time horizon of 5-7 years, is fixed income and increasing exposure there a no-no?

Dhirendra Kumar: Yes, long term fixed income allocation is a no-no. Historically, Indians have been investing in fixed income that has been the staple. So if you have your PPF account think of it as a fixed income allocation and that is not subject to any change in interest rate outlook.

Interest changes, nothing happens to your money. In fact, on the contrary, your PPF and EPF might be yielding more because interest rates are going up, we do not have that inverse relationship, you have a direct relationship.

And most individual investors should not try to actively manage their fixed income allocation. If you are trying to be passive with your allocation, for example if you have your equity saving fund, one-third of that money is in equity and two-thirds of it are almost fixed income. Likewise, is one-third of your money in aggressive hybrid funds is fixed income, you do not have to do anything about it.

Fixed income fund managers are taking the risk there, they are buying corporate bonds, they are trying to enhance the yield and the outlook changes in interest rate do not affect those funds. In case of aggressive hybrid funds, you have two-thirds of it in equity. So those investors are very much used to it.

The reason why investors should have a fixed income is that it provides greater stability to an overall portfolio and with that in mind I do not think investors should be doing any tactical thing with fixed income.

ETNow: Would you recommend that for the short term, a Motilal Dynamic Equity Fund or L&T Dynamic Equity or investment or Edelweiss Balanced Advantage Funds is a good option or would you say go for a pure play savings fund instead?


Dhirendra Kumar: No, they are great funds. If you are looking at long term investment and you want a steady take on growth, those are funds where one-third of the money is in equity, one-third in fixed income and one-third of it is arbitrage. This is actually an old fashioned way of doing it.

All these funds were designed before the long term capital gains tax kicked in. So they were actually a tax efficient vehicle. Because these are funds with the one-third allocation to arbitrage opportunities. These funds derive the character of equity from a taxation point of view and the character of these investment fundamentally is like that of a fixed income. These are almost like liquid funds with one third allocation. This was primarily a tax vehicle. I think investors will be better off with such funds if you are conservative and looking at long term investment and want to have a very steady take on growth.

ETNow: What if you really want to play the short term fixed income portfolio for the next 2-3 years? Any fund name apart from liquid funds which one could look at?

Dhirendra Kumar: No, I would urge you know this is for the corporate treasuries to do it and that is where 90 per cent of the money is actually from those people. Individual investors should not play fixed income. They should rather not play in the market they should be investing.



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