All through my 14+ year experience Iv always been comfortable in equity Investing rather than Debt or fixed income investments solely because when analysed carefully with longer time frames, equity (read Mutual Funds) tend to give decent returns as compared to debt investments but the main reason was that inspite of keeping all the checks I just could not be 100% sure about only one thing – will my capital be safe ? Inspite of all the fancy words, debt investments are only transactions where you are lending money to someone & there is always a possibility of money not returning from the debtor. All we can rely on are the so called rating agencies which are in question after the recent defaults by ILFS, DHFL, Reliance ADAG, Altico & now Vodaphone Idea. Altogether I did not ever trusted the rating agencies while investing in equities as well, I have my own way of Investing in Mutual Funds for self & clients.
If I had to choose the debt investments for clients the only area I looked upon were the safest options which included liquid, arbitrage, accrual debt funds & a very few government secondary market bonds. The major reason for this is the diversification & the safety these investments have while lending money to anyone. All my life the one type of investment I did not touched were the ones where the lending is done to a single company in the forms of NCD’s & Corporate Fixed Deposits except a very few PSU bonds as I mentioned earlier. Recent defaults by DHFL, JP Associates etc have confirmed my theory.
But many people don’t look anything except the high interest rate on offer by such products, not the risks involved nor the profile of the company. An ongoing NCD is offering high interest rate & some of the clients called to invest in it, I am absolutely not comfortable with the company & I outrightly rejected the call. But some of them are forcing that they want to do it in any condition. I asked them why do they want to invest in it ? & the the answer I got the most was that the Interest is high & one of their friends or family member has invested in it ! (basically meaning that since they have invested so the investment must be safe.)
Clients gave me 2 reasons to invest & I gave them more than 7 major red flags iv been seeing in this investments which give enough evidence that the capital will be at major risk in these investments. But I feel that some of them will do it anyway just to grab that high interest rate without knowing the cost at which they will be getting that interest, it could be complete capital loss or waiting for an indefinite period to get their capital back in case of defaults.
A very common example of the love for fixed income without knowing the facts is LIC. I bet the agents themselves cannot calculate the actual return one is getting in LIC fixed income products coz if they were able to do that & they were ethical & integral towards their clients then they would have never suggested most of the LIC products ever.
The irony is people wait for 15-20 years in an LIC policy but find it difficult to hold on to Mutual Fund investments for a span of even 5 years. I guess the liquidity which Mutual Funds provide is the prime reason for it but that’s what differentiates a successful Investor from an unsuccessful one who redeems the investments midway for one thing or another. Basically it all lies in the Goal Planning & Discipline one puts into his Investments.
The best thumb rule is to put all the money which is required after 5 years should go into Equity Mutual Funds with proper goal planning & risk assessment & the one which is required in less than 5 years should go into fixed income but in the instruments which are credible, diversified & provide liquidity.
Compounding can do wonders if the equity mutual funds can be held for long time frames coz
