Investors continue to be bullish on equity markets. This is what the result of a recent poll by Equitymaster suggests.

Last week, a poll was conducted on our Web site to gauge the investment preferences of our audience at the current juncture. The options provided to them were: debt, equity and fixed-return instruments.

The result was an overwhelming majority for investment in equities (77%) followed by fixed instruments (13%) at a distant second while investments into debt could garner a mere 10% of the total votes.

Let us consider the probable reasons that could have prompted investors to select their respective options.

Beginning with the 'unfavourable' (debt) investment option, the reason for the lower attractiveness could be the fact that the debt market bull run has (more or less) come to an end. Gone are the days when double-digit returns (thanks to tumbling interest rates) were the order of the day. Now investors would have to satisfy themselves not only with single-digit returns but also bear the risk of the possibility of rising interest rates, though not in the immediate term.

With the government failing, as yet, to control inflation in the promised band of 4%-5% and the investment cycle showing signs of recovery, it threatens to push up interest rates, which in turn would have a negative impact on debt instruments/funds.

It must be noted that returns in debt instruments are inversely related to interest rates. However investors could get some respite if the interest rates move up as the yield on the debt instrument would also move upward.

Now let us move on to the second investment category i.e. fixed return instruments. This assured return investment option has made the going tough for the risk-averse investment community (especially the aged class, for whom interest income has always formed an important source of revenue), as interest rates have halved in the last decade or so.

However, at the current juncture (month of March), these investments became all the more attractive owing to the various tax benefits available on some of these, which could be as high as 20% in the form of income-tax rebates if the tax-payer falls below the 1.5 lakh (Rs 150,000) per annum income bracket.

Another traditional reason for investments into fixed instruments like National Savings Certificate, Kisan Vikas Patra, various post-office schemes and the good old bank fixed deposits is the security of capital owing to the government backing to these.

However, while the one big positive for investing in these instruments is the fact that one can get his investments locked in at higher rates in a falling interest rate scenario, getting into these at current interest rate levels and with inflation at 5%-6%, the real return on these investments would be very low.

Going ahead, with India shining bright, the domestic equity markets are also on a roll having more than doubled since the rally began in late April 2003! The euphoria towards equities is what is reflected in the poll also. With the economy slated to achieve a 7%+ growth on an annualised basis, on the back of strong improvement in the agricultural economy, we feel that the Indian growth story could continue for some more time to come.

Also the effects of this strong growth will be seen in 2004 as higher income (thus higher demand) reaches the rural population. The improvement in financial performance of India Inc. would further be augmented owing to continuous cost cutting measures being adopted by industry players and the low interest rates prevailing in the economy, which would support investment activities.

To conclude, while we reckon that all of the above assets are necessary in an investor's portfolio, it is the share of each in the overall scheme of things, which is of prime importance. We are talking about asset allocation here, which depends on various parameters including the age of the investor, the investment horizon, the return expected and the risk that one is comfortable with among others.

Thus, an investor 'must' work out the asset allocation suitable to his profile for a safe and steady investment portfolio with adequate returns.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.