I plan to park Rs 4.5 lakh each into HDFC Banking & PSU and ABSL Short Term. I will then shift this corpus into existing equity mutual funds if and when there is a correction in the stock market.
Should I wait for a bit of market correction to invest my corpus into the debt funds or do these above mentioned debt funds have no correlation with the Sensex/Nifty?
Would it be prudent to do a lumpsum investment in the debt funds or should it be staggered?
The fixed-income asset class has different risk- return characteristics compared to equities. and historically has had a low correlation with equities. A low correlation between a pair of assets/asset classes indicates no significant relationship between their performance.
As the name suggests, fixed-income investments aim to earn a stable income stream and are used by investors to protect against erosion of purchasing power of their money. Given their low correlation with equities, these are not impacted by either sharp up/down movements in equity markets.
As fixed-income investments are not as volatile as equities and tend to move upwards steadily, you can invest a lumpsum amount into fixed-income funds to start with, and then use the systematic transfer plan (STP) route to periodically and consistently shift the exposure into equities.
Invest into fixed-income funds with a high quality (safer) portfolio and minimal duration (interest rate) risk such as ultra-short, low duration or money-market funds to protect the corpus from any drawdowns. Look at the past performance of the fund to evaluate any significant downgrades/defaults in the portfolio which are testament to a fund’s risk management process.
Ensure funds selected for STP do not have an exit load – most shorter duration funds do not levy any exit load currently.
Valuations play a defining role while entering any asset class. Lower (cheaper) valuations reduce the risk of drawdowns and improve upside potential, and vice-versa. Having witnessed headwinds in February-March 2020, equities have since rallied sharply with benchmark indices touching record highs on the back of a glut of liquidity pumped in by global central banks, fiscal support, and optimism over a faster-than-anticipated economic recovery amid vaccine roll-outs and easier lock-down conditions.
The sharp market rally has resulted in seemingly stretched valuations, which has toned down future return expectations from equities. However, if you have a long investment horizon (10+ years), equities can be expected to deliver superior returns than fixed income.
You may also consider investing into attractively valued global regions via exposure to international funds. International equities offer exposure to diverse economic growth drivers and provide a hedge against currency depreciation.
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