If today's chart of the day is any indication, looks like investors have rekindled their romance with bond funds. As the chart highlights, close to a whopping Rs 70 bn have been poured into debt funds by investors since June 1, 2016. In comparison, equities have attracted investments worth a paltry Rs 4 bn during the same period. In fact, even the couple of months prior to that, debt funds have garnered significantly higher inflows than their equities counterpart.
The reason? Well, the old habit of looking into the rear view mirror and not the windshield. Experts contend that since debt funds have given better returns than equity mutual funds over the last one year or so, investors are optimistic that the trend will continue. They further argue that as stocks markets are looking expensive and as there are hope of rate cuts on the anvil, there's even more reason to tilt towards debt.
Well, according to us, it is not the returns of the past but the valuations that count. Stocks have run up alright but they are nowhere close to being very expensive. In fact, at the current valuations, the Sensex is trading at a small premium to its long term average, which in our view cannot be termed as very expensive. Besides, when you consider that corporate profit margins are at multi-year lows and could rebound over the medium term, then the case for equities becomes even stronger. The current markets call for at least a 50%-60% tilt towards equities and the rest towards debt if not more.
Data Source: The Economics Times