No Safe Heaven – Debt or Equity

Indian middle class with huge inclination for savings grew with an idea that fixed deposit with Public Sector Banks is as safe as mother’s arms. Once upon a time the total investments in fixed deposit were more than the market capitalization of the stock exchange. Parallel to that   investments were also made in Unit Trust of India (which for strange reasons was not regulated then) until there was dent in the word trust in early last decade.  There was no dearth of Ponzi schemes which lightened the pockets of investors who aimed for higher returns. Series of stock exchange scams shattered the confidence of investors. Fixed deposit with cooperative banks with higher returns also lured the investors and they learned a lesson or two there as well. With lots of unbridled lending by Banks and questionable investments by mutual fund debt schemes investors are simply confused.

Investors are trying to find out what is SAHI HAI for them.  Investments in debt mutual funds were projected as safer more lucrative than the traditional fixed deposits.  Investors are attracted by the obvious tax benefits that debt funds provide compared to other products. Besides an inherent risk when interest rates are low may translate into higher returns, but the same may wipe off your capital once the inclination for rates starts upward. The main cause of the current crisis is IL&FS saga. The notion that debt funds are safe has proved to be fiction. Out of the blue, IL&FS was junked from the highest credit rating of AAA, by fickle rating agencies on account of its inability to repay the debts. Irony is that the financial infrastructure of a Nodal agency for funding infrastructure collapsed like the Himalaya Bridge at CSMT station. Many more corporates have joined the list like Reliance, ZEE and  Jet Airways to name the few. Some will come out of this crisis and some will prove to nightmare to investors.

Let’s us figure out at some of the aspects that influence the performance of debt funds and misconceptions about debt funds.

  1. Many TIMES FPI in flows in debt markets increase demand for debt funds. We have seen lot inflows in debt funds recently. Abrupt exist BY FPIs can hamper the performance of funds.
  2. Government of India’s 10-year bond decisive factor in determining the returns of the debt funds. RBI’s bi monthly policy decides the Repo rate which in turn influences the yield on bonds. Like life nothing moves in a straight line so are the yields. Volatility in bond prices may result in negative returns in short run.
  3. Investment risks: In order to obtain good returns the debt funds look out for an opportunity to invest in low quality rated papers. Any wrong call may be disaster. Like equity fund managers do look for low rated papers to gain higher returns in the long run.
  4. RBI policy indicate stance in terms of the economy. Any significant changes in the growth numbers give room for speculation to predict the Repo rates in advance. Such predictions may result in high or low returns.
  5. India’s dependence on crude oil imports is well known. Any northward movement in crude puts pressure on rupee vis a vis dollar. Higher crude price means inflation which influences the repo rate and the yields.

Like equity portfolio even debt portfolio needs monitoring. Global GDP rates, FED rate and recent trade wars have played major role in influencing factors that decide the returns. So investor be aware whether debt or equity there is parity in safety or non- safety as you perceive. 

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