Dear All,
Here is an appeal to
Indian investors to look at fixed income funds! Hope it helps.
Even today a
conservative Indian investor continues to confuse mutual funds with equity. It
is precisely because of this lack of understanding that they miss on the
superior risk adjusted returns, easy liquidity and tax benefits that fixed
income funds have to offer. Today 72% of the aggregate AUM of the mutual fund
industry in India is invested in debt funds, thus marking the prominent
position that fixed income funds hold in the asset management space.
While most retail
investors do have a fair idea of the conventional financial instruments such as
Bank FD’s, G-Sec, company NCD’s, they seem to be unaware of the fact that fixed
income funds in India in fact invest in various combinations of these
instruments only. The portfolio exposure(as of Nov’12) at the industry level
shows that of the entire fixed income AUM ~10% is invested in G-sec, 53% is
exposed to corporate securities and ~36% is invested in Bank FD’s. It is thus,
important to understand that fixed income funds are nothing but a conduit to
invest in such securities, only in a more efficient manner. Not only that, the
investor through these funds gets the opportunity to choose from various
schemes depending on his risk appetite and the desired tenor. He can custom
make for himself a healthy salad by choosing from liquid fund, liquid plus
funds, Short term income funds, GILT funds, income funds etc.
But is variety a good
enough reason to shed the conventional thrift habits and shift to savvy fixed
income funds? Certainly not, but who says that’s all. Fixed income funds have
much more to their merit. Sound investment philosophy germinates from prudent
portfolio diversification, and that is exactly what debt funds do. The idea is
to invest in the right securities at the right time and in the right proportion
to garner the highest return every time. Such a task requires expertise and
skill which a retail investor may not possess due to his distance from the
intricacies of the market.
While a typical Indian
retail investor is always more keen to invest in bank FD’s, what usually skips
his mind is the threat posed by volatility in the inflation trajectory, which
is inevitable in a developing economy. So when you lock in your money for a
fixed tenure at a certain rate with a set anticipated trajectory of inflation
that allows you to earn positive real return on an FD, the math completely
falls apart if inflation starts to misbehave and eats into your returns. It is
here that the flexibility and agility of the fixed income funds play a pivotal
role in securing better real returns through prompt portfolio allocation.
Very often investors
start comparing pre-tax current return on FD’s with the past performance of
various debt schemes and jump to the conclusion that FD’s are better. But
that’s incorrect. What they should technically compare is the post tax return
on FD in the same time span for which they are looking at the return on debt
schemes. And once they do start comparing apples with apples, they’ll see how
tax adjusted returns from debt funds are superior to those offered by bank
FD’s.
Apart from these, the
ease of liquidity that fixed income funds offer vis-à-vis bank FD’s and the
like cannot be over looked. If you withdraw your money before maturity from an
FD, you are liable to a monetary penalty, but, if you have invested with a debt
fund you can redeem your units anytime you like without losing the gain accrued
to you till that date! The same applies in case of pumping in small savings.
Imagine opening an FD for Rs 2000-3000 every month!!
It is then difficult to
justify as to why the retail investor participation in fixed income funds in
India so low, even when the institutional investors are in fact making good
returns from the same. The usual answer is the fee that they are charged. But
is that a reasonable justification? You are ready to pay a doctor his fee for
your diagnosis, even when you have the option if using the tried and tested nani
maa ke nuskhe, then why this discrimination in case of financial
services? The most nominal fee that the fund houses charge is for the expert
guidance that they provide as the care taker of your money while bearing the
huge onus of delivering superior returns time and again.
I think it’s time the
retail investors, for their very own benefit ,move on to fixed income funds and
take advantage of professional fund management expertise at low costs, which is
already benefitting their institutional counterparts.
Regards
Sunil Chachlani
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