It may just be the right time for mutual fund investors to move money from debt mutual fund schemes to equity funds in the next few days.

5 Reasons to switch money from debt to equity mutual funds

1) Interest rates have fallen 150 basis points

Interest rates in the last 1 year on fixed income yielding securities have fallen 150 basis points or 1.5 per cent in the last 1 year. When interest rates fall, and that too rather dramatically, there is no way debt mutual funds can give you returns of the past.

We believe that interest rates may drop by another 50 basis points in the next 1 year. This is why returns from debt funds would be lower in the next 1 year.

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2) Fall in interest rates benefits equities

Equities and interest rates generally move in the opposite direction. When interest rates fall, equities rally and vice versa. Investors getting poor yields from fixed income securities start chasing stocks, pushing equities higher. Hence returns from equity mutual funds are much higher.

3) Economic revival likely

There is likely to be an economic revival and greenshots are already showing. Bhel, which may be considered a good proxy for the economy has shown a surge in order book. Something that we have not seen in many quarters now.

IIP data has also shown a good uptick and prices are falling. All this may lead to a strong rally in equities, which may make equity mutual funds a better proposition than debt mutual funds, keeping a 1 year perspective in mind.

4) Markets still 15% lower than March 2015 highs

Indian benchmark indices are still a good 15 per cent lower than the lifetime highs hit in March 2015. This makes them pretty attractive from a 2 year perspective. With a revival in economic activity, we believe the markets could be higher.

5) Monsoon a big factor

If we assume that monsoon could be normal, as predicted by Skymet and IMD, it could lead to a revival in rural demand. Demand from rural areas has completely slumped, due to agrarian distress in the last couple of years. This could mean better demand for a host of products by leading manufacturers including 2-wheelers, FMCG players etc. Thus it makes sense for investors to invest in equity mutual funds, rather than debt mutual funds from a 1-2 year perspective.

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