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last financial year in terms of returns were clearly dominated by the spectrum of debt
funds. The three rate cuts announced by the Reserve Bank of India during the last
financial year ensured that debt funds stole the honours. Over a one-year time horizon
debt - speciality funds have returned 19.21 per cent while debt - medium term funds which
comprise of income plans etc have given investors returns of about 15 per cent. But
clearly investors in Gilt funds have been the happiest of the lot. This segment has
notched returns of over 25 per cent in the last financial year. However, industry watchers are of the opinion that the interest rate
scenario of last year (when interest rates fell by 300 basis points) is unlikely to be
repeated this year which could prune returns from debt funds as compared to last years.
Conversely, the bets this time around are clearly on equity
funds. With stock valuations having turned attractive the equity funds are expected to
have a good run. Over the past three months equity funds have climbed the returns ladder
displacing debt funds. Diversified equity funds have returned about 13 per cent, equity -
infotech 11.78 per cent, equity - pharma close to 10 per cent while balanced funds have
rise about 9 per cent.
The recent changes in the budget with regards to mutual
funds also makes equity funds worth a look. The dividend tax has made it imperative to
invest in growth options of mutual funds for the long term (over one year) and pay capital
gains rather than the 10 per cent tax on dividends. Equities by their very nature have
proven to give better returns over the long term.
However, equities carry higher risk so you would have to
look at your risk profile before contemplating investment. One of the options to reduce
the risk is to have a mutual fund portfolio of equity and debt funds. Equity can provide
the higher returns while debt funds can reduce risk and give steady returns.
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