Debt Funds: The portfolio stabiliser
Many of you who started investing in equity mutual funds somewhere in the year 2014 had never seen a serious downturn in the equity market. Hence they never thought that investing in debt funds made any sense. If they wanted any exposure to fixed income securities, age-old bank Fixed Deposits remained their favourite.
Nonetheless, the volatility in the equity market in the last 10 months has been an eye-opener. Debt market has also gone through its own share of volatility, but most of them have outperformed the equity fund in the last one year. Barring few categories such as IT and Pharmaceutical, all other categories of equity funds on an average have generated a negative year in the last one year.
In case of the debt fund, in the last one year, not a single category has generated negative returns even in last one-month, three-month or six-month duration.
To make it clear how your portfolio would have performed in case you have diversified your portfolio, we generated different scenarios. Our base case was half amount invested in debt funds and a half in equity funds. This is again divided in the following proportion.
| Category | 1 Yr avg. Return (%) | Proportion of Portfolio |
| Equity Large Cap | 0.26 | 20% |
| Equity Mid Cap | -10.7 | 20% |
| Equity Small Cap | -15.35 | 10% |
| | |
| Debt Long Duration | 3.3 | 15% |
| Debt Medium Duration | 4.26 | 15% |
| Debt Short Duration | 4.81 | 10% |
| Debt Ultra Short Duration | 5.97 | 5% |
| Debt Liquid | 6.77 | 5% |
The following table shows that how your overall portfolio would have been with different proportion of equity and debt.
| Portfolio Returns with different proportion of equity and debt |
| | Equity Portion |
| | 50% | 45% | 40% | 35% | 30% |
| Debt Portion | 50% | -1.37 | -1.01 | -0.65 | -0.28 | 0.08 |
| 55% | -1.15 | -0.78 | -0.42 | -0.06 | 0.30 |
| 60% | -0.92 | -0.56 | -0.20 | 0.17 | 0.53 |
| 65% | -0.70 | -0.33 | 0.03 | 0.39 | 0.75 |
| 70% | -0.47 | -0.11 | 0.25 | 0.62 | 0.98 |
The above table clearly shows how your returns would have improved had it be well-diversified to debt. The portion of the debt and equity along with their sub-class can be decided based on your risk profile and investment horizon.