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If you are an investor in Equity Mutual fund, then for at least one time you must have thought to get out of it and switch to fixed-income assets after seeing volatility in equity prices. And if you are still thinking or planning for the same, then I would suggest dropping your idea, as it might prevent you from achieving your equity-linked financial objective.

Equity mutual funds are long term investment, where investors plan their investment for big goals, with the thought they will get better returns with inflation added to it. While investment in Fixed income assets is generally planned for capital protection or to earn a regular income.

And if you think you can preserve the capital in the way by taking out your capital from Equity for now and then again participate in the market once the uncertainty gets over. This strategy of yours is much difficult to implement as one cannot predict the trend in the market, it can only be realized, after it has happened or when you look back, but never before it happens.

What you will lose from your investment if you switch? 

Let us understand this situation with an example, that what you will lose if you switch to fixed income assets.

On the 23rd of March, the Nifty 50 fell slightly more than 1100 points or 13% at the close of trade, this was a big fall in the market in a single day. After this many of the Equity investors must have planned to switch to fixed income, as this much fall was enough for them to lose their patience.

Suppose if an investor would have switched to Fixed income asset from his equity investment including systematic investment plans (SIPs) after this fall then he must have missed the roughly 11% rally that followed in the next two days. The 11% raise that he might have lost is more than what he would have been able to recover in a year by switching to fixed income funds

While switching from your Equity mutual funds to Fixed income funds, you end up doing two things, converting your temporary losses in permanent and secondly, you will preserve only the left-over capital.

While there could be a further fall in equity value from here, historical experience in the market shows us that over a period of time stock prices begin to recover and track their fundamental value based on earnings growth.

Here you need to rethink and reconsider you’re your financial goal for which you are investing in equity mutual funds. Remember the importance of your goal and your strategy to achieve it. By switching to fixed income, you will not be able to make the kind of growth you need to achieve this equity-linked long-term financial goal.

Reconsider the costs involved in Switching

While switching from Equity mutual fund to fixed income you may have to pay certain charges involved. You may have to pay the exit load associated with your Equity mutual fund, in case if you withdraw your money after one year of investment. Also, you would have to pay the capital gains tax (if any) on exit from equity, and when you invest in fixed income your tax liability changes. Fixed income funds have their trend of charging taxes on your investment, that is higher, thus, you will add one more obstacle in achieving your long-term financial goal.

Most importantly, if you switch to fixed income assets, definitely you will lose the chance the earn returns engrossed with inflation-beating capability, that is offered by Equity mutual funds.

Overall, if we conclude, then it is completely not recommendable to investors, to switch to Fixed income assets from your Equity mutual funds, as it will restrict them from creating the required corpus for their financial goals. Instead, you must continue your regular investments in equity mutual fund at this time, for the months forward as it will help take the advantage of buying more because of lower prices of assets.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).