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I have accumulated Rs 10 lakh in debt funds. In the last three years, they have generated only 5.5 per cent returns. Would it be wise to move this amount as a lumpsum to a large-cap equity scheme like Bharat 22 to earn better returns? Being a large-cap fund, I believe it is likely to be safe. Kindly advice. - Arjan Bhatia
No. This is because both debt and large-cap funds serve different investment needs.
Debt funds are designed to bring stability to your portfolio and aim to preserve capital while generating moderate returns.
Thus, debt funds are a suitable investment option if you need money to meet your short-term requirements.
Conversely, large-cap funds invest at least 80 per cent of their money in the top 100 companies (as per market capitalisation) in the country. While they are less risky compared to mid- and small-cap funds, they are essentially equity funds, which, in any case, are more volatile than debt funds.
So, which type of fund is right for you? To answer this, you need to know your investment horizon, i.e., how long you have to meet your financial goals. For instance, if you require money within a year or so, consider investing in liquid funds; if you need it after a year but before five years, spread it across a handful of short-duration funds.
On the other hand, if you have a longer investment horizon (more than five years), equity funds are an ideal investment choice.
That said, if you have never invested in equity funds, starting with an aggressive hybrid fund would be good. It parks around 70-75 per cent of the money in equities while the rest is in fixed-income securities. A modest allocation to debt cushions against market declines, while a higher exposure to equity helps you earn greater returns over the long run.
Further, it is recommended that you avoid investing a lumpsum in equity funds since you risk investing all your money at a market peak. Therefore, it is better to spread your investments over a given time period.
To learn how to decide the duration over which to spread your lumpsum while investing in equity funds, click here.
This article was originally published on April 25, 2024.
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