Time To Go Aggressive On Equity Funds

The event that unfolded last fortnight clearly shows how important it is to remain invested in equity. Some not-so-smart investors, who tried to time the market and were waiting for the market to bottom out, might be sulking because of the lost opportunity. We have always maintained that it is futile to time the market; rather, you should remain invested in the market. This is because returns in the equity market do not come in a straight line but in lumps and hence you see few big returns on either side, which are hard to predict. Therefore, the best thing to do is to remain invested.

In the current situation, there is compelling reason to increase allocation towards equity funds. This is because the corporate tax cut is a structural change that is likely to benefit the equity investors more than any other asset class. On the contrary, this corporate tax rate cut is making the investors of debt fund nervous. This bold action taken by the government will mean they have to forgo Rs.1.45 lakh crore of revenue every year. It implies higher fiscal deficit, at least in the initial years. According to some estimates, it will be in the range of 3.7-4.0 per cent this financial year against the earlier estimates of around 3.3-.3.4 per cent.

A higher fiscal deficit will mean higher bond yield especially for long duration bonds and gilt. This was visible in the movement of the 10-year benchmark bond yield that jumped from 6.64 per cent to 6.79 per cent in a day after the finance minister announced the corporate tax rate cut. There is inverse relationship between bond yield and bond prices and hence the rise in bond yield means negative returns for debt funds. Therefore, when the debt funds are likely to see sluggish returns and equity funds are likely to perform better, it makes sense to increase your allocation towards equity.