If you firmly believe that all things must come to an end, then the decline in equity markets this week should come as no surprise.

The BSE Sensex after peaking to record highs, had a reality check, correcting 1.41 per cent to close at 6234 points. The S&P CNX Nifty closed lower by 1.03 per cent to 1,969 points.

This week large caps took a backseat and it was mid caps once again in the limelight. Magnum Global Fund (3.39 per cent) stormed into first place to recover a position it had relinquished over the last few weeks when large caps dominated. Other mid cap funds that dominated the rankings include Sundaram Select Mid Cap (2.50 per cent) and Reliance Growth (2.36 per cent).

As the large cap indices Sensex and Nifty fell this week, category leaders -- HDFC Top 200 (-0.18 per cent), Franklin Bluechip (-0.19 per cent) and HSBC Equity (-0.88 per cent) witnessed a decline.

You would think long-term investing is relegated to textbooks. Much as the equity fund manager would like to practice this long-abandoned art (at least in the Indian context), he is not allowed to do so.

Constant redemption pressure and the investor's obsession with short-term NAV appreciation forces the fund manager's hand and he is compelled to look for short-term investment opportunities thereby compromising the long-term perspective.

However, at least one fund category, ignored by the equity fund investor, may be just what the doctor ordered; tax-saving equity funds have a 3-Yr lock-in and afford the fund manager the kind of breathing space he so badly needs.

The 7.37 per cent 2014 GOI benchmark yield fell 9 basis points to close at 6.70 per cent (December 10, 2004). This was the second week in succession when bond yields fell. Bond prices share an inverse relation with falling yields translating into higher bond prices and net asset value for debt fund investors.

Leading debt fund managers have been advising investors to consider investing in long-term debt funds for some time now. The finance minister's comment that high inflation could be a thing of the past is also significant.

Expectedly long-term debt funds were major beneficiaries of the fall in bond yields. Coincidentally, all the leaders that emerged this week have a track record of more than five years. This is a departure from a trend when we often saw floating rate funds and dynamic debt funds launched less than a year ago dominate the weekly rankings.

Balanced funds saw an uptick in performance thanks to the appreciation in mid caps and softening bond yields. There were no surprises in the rankings with HDFC Prudence, the category leader, featuring with a 0.78 per cent growth.

As the mid cap and large cap rallies take turns to confuse the investor on where he should be invested, the going isn't getting any simpler for the investor. One week we have the mid caps rallying, next week we see them doing the disappearing act only to see large caps make a comeback. Does this mean investors should shift from mid cap equity funds to large cap funds as the situation demands? We believe that from a diversification perspective it makes imminent sense to include both categories in your mutual fund portfolio, so that you have something working for you at various points in time.

As equity markets scale unprecedented heights, the investor must get increasingly cautious of a string of factors that could be his undoing. Its not just precariously high markets that are a spot of bother, greed, deviation from risk-return profile and hawkish investment consultants can be just as unsettling.

At the end we advise investors who have been waiting patiently on the sidelines for a correction in equity markets, to gradually increase allocations to equity funds when they see further decline in the index.

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