Given the rally in the equity markets, everyone is gung ho on equity. In fact, in the past three years, equity funds have delivered superior returns over other asset classes such as gold, real estate and debt funds.
In such a market rally, many advisors find it difficult to encourage their clients to follow asset allocation due to client’s resistance for low yielding products. Also, many clients prefer focussing on returns over asset allocation.
However, a few analogies from day-to-day life will help advisors explain to them the significance of investing in debt funds even when equity is fetching good returns.
Let us look at some of those analogies. What is the first thing that comes to your mind when you think of food? Of course, taste (returns in finance parlance). Though taste is important, it is not the only parameter to decide what you will eat.
If you are vegetarian, you will not eat non-veg food, even if it tastes good. If you have a medical condition and are prohibited from eating something, you will not eat it, even if it tastes good. Conversely, if your doctor has advised you to eat something, you will eat it, although you do not like it (green tea). To summarize, your food has to be suitable for you from multiple perspectives and not just taste.
Let us take another example of the clothes you wear. The comparable parameter to returns in this case is looks – how you look in it or how others appreciate your dressing sense. However, if you like a leather jacket or you look good in a leather jacket, you will not wear it in sweltering heat. Sometimes some people wear uncomfortable stuff for the sake of fashion to look good, but those cases are extreme. Normally, you would not wear skimpy clothes in biting cold weather. Here again comfort has been prioritized over looks.
Use such analogies to explain the relevance of debt funds to your clients.
Post retirement, the corpus is more about sustenance than appreciation of capital. Your clients may have some equity exposure, say 10% or 20% of their allocation, but the majority should be in debt schemes.
Even in mid-career stage when the investment horizon is reasonably long, equity may have a majority allocation in your portfolio, but debt provides stability to the portfolio.
To sum up, you should explain to your clients why they should allocate a reasonable portion of their asset allocation in debt funds to achieve their financial goals. You can help them identify their financial goals and link it with the mutual fund schemes depending on the risk appetite and time horizon.