If you had put money into equities in the last one month you must be feeling quite miserable. Because whatever the scheme you picked, chances are that you would be out-of-the-money, to use derivatives parlance.

But don't lose heart. Those of you who have spent time in the market know that its well worth it -- the average returns for diversified mutual funds in the last one year has been 23.61 per cent with the top two giving you 55 per cent and 50 per cent, respectively.

 And the average two-year return has been a handsome 70 per cent with the topper giving you over 100 per cent. The three-year returns of 42 per cent too is nothing to be sneezed at.

With the markets coming off from its highs, this could be a good time to put in some money into equities, especially if the share of equities of your overall portfolio has come off.

Says Arpit Agarwal, head, private banking, ICICI Bank [Get Quote], "The markets could remain volatile, but it makes sense to average."

Abhay Aima, country-head, private banking, HDFC Bank [Get Quote], said: "We are looking at a Sensex of around 7200 cent by the end of the year and so one could expect a return of between 15-18 per cent."

Another head of private banking at a foreign bank said, "Equities are still in favour because if one looks at the last fifteen years, anyone who invested systematically earned more post-tax that he would have from a Reserve Bank of India [Get Quote] Relief Bond or the public provident fund."

"With the Sensex trading at around 11 times the estimated consensus earnings of Rs 585 for FY06, we do not believe that the markets are too overvalued, though there could be some downside risk to the earnings estimate."

Performance Update � Equity Funds	(NAV as on April 13, 2005)
	AUM (Rs crore)	1-year return	2-year return	3-year return
Diversified Funds
Reliance [Get Quote] Growth � Growth	1037	55.25	103.86	68.44
HSBC Equity Fund - Growth	1575	23.15	86.56	-
HDFC Equity Fund - Growth	1075	21.58	70.08	44.45
UTI Mastershare	1339	12.21	51.27	30.24
Franklin India Bluechip � Growth	1651	11.89	65.52	40.48
Sector Average	-	23.61	70.74	41.69
BSE Sensex	-	9.54	46.76	23.19
Speciality / Mid-Cap Funds
Sector Average	-	40.54	75.75	44.53
CNX Midcap 200	-	67.4	100.81	53.4
Balanced Funds
HDFC Prudence Fund � Growth	693
Prudential ICICI Balanced � Growth	169
DSP-ML Balanced Fund � Growth	233
FT India Balanced Fund � Growth	168
Birla Balanced Fund � Growth	139
Sector Average	-	20.08	48.20	29.69
Note: Annualised returns %
Source: IL&FS Investsmart

Agarwal believes that it is better to stay primarily with large cap diversified funds rather than allocate too much money to mid-cap schemes, since mid-cap stocks still command valuations that are still relatively expensive."

"Not more than 20-25 per cent of your equity allocation should be to mid-caps," he observes.

Aima agrees. "One should not restrict oneself to only mid-cap stocks especially when the market is so volatile. The diversified funds have the flexibility to invest in stocks of different market capitalisation and that is a better bet," he says.

A private banker points out that Fidelity is one fund that has said it will invest across categories. That is ideal, he said.

A glance at the mid-cap funds reveals that most of them have not been able to outperform the CNX Midcap 200, though the returns in themselves over one year and three years have been fairly good.

Among mid- cap schemes of which there are not too many at present, wealth managers like the Templeton Prima which has had a good track record and notched up a one year return of 51 per cent.

As far as the large cap diversified funds are concerned, they present a relatively safer opportunity, and private bankers feel that schemes such as HDFC Capital Builder which also invests in mid-caps, are a good buy.

They also like schemes which have the ability to park larger sums in cash as that would protect them in a falling market. And of course since the volatility is not about to go away in a hurry, a scheme with a lower historical volatility can't hurt.

Again with the debt markets looking vulnerable to increases in interest rates and therefore, yields, it might be a good idea to opt out of a balanced fund altogether.

That's if you have held it for over a year and do not need to pay short terms capital gains tax. Instead, you could buy into two separate schemes, one for equities and the other for short-term debt such as a floater or a liquid.

Balanced funds tend to have some component of longer duration debt paper making the scheme slightly more risky. If you have money in two different schemes, you are in a better position to exit either one in the event of something going wrong.

If you are ever compelled to exit a balanced fund within one year, you would be liable to fork out the short-term capital gains tax on the entire amount.

But it is not necessary that a mutual fund house with the best performing equity schemes also has the best debt schemes. As Agarwal observes, it might be better to choose the best funds on your own, perhaps from different stables, and create the balance yourself.

Balanced funds as a category have done fairly well over two years giving a return of 48 per cent but over the last one year they have yielded a return of just 20 per cent with the top performer giving a 31.7 per cent return.

The HDFC Prudence plan, which has had a good track record over the last five years, and has the largest assets under management (AUM) of nearly Rs 700 crore is preferred by wealth managers. In fact, most balanced funds have very small AUM of below Rs 250 crore, which makes them more vulnerable to shocks in the market.

So, don't worry about the ups and downs of the market, invest systematically every month, stay put and you can't go wrong.