When gold prices fell steeply earlier this year, we were flooded with ‘told you so’ articles. No one seemed bothered at that time to emphasise that gold is meant for long term investing only, and that such volatility is natural. Before the crash everyone was saying, ‘buy golf ETFs’, ‘allocate 10% of your portfolio to gold’. Now no one is even using ‘gold’ in an article.
Yesterday debt mutual fund NAVs fell and immediately we are flooded with knee jerk articles on what ‘investors should do now’. Some blame AMCs for not educating investors and marketing debts fund as ‘safe’ investment options. Other articles say, ‘stick to FDs’.
What utter nonsense! When I started freefincal, I told myself I will not react to everyday financial occurrences since that will do more to spread panic than ‘literacy’. However the kind of nonsense that gets on the www forces me to write this.
Investors should choose debt mutual funds based on only two factors:
- When they need the money
- How important is the need.
Returns and Tax are completely secondary.
In any case, as they near the need/goal, the money must be shifted from risk debt funds like ‘bond and ‘income’ funds to a simple good old savings bank account. This is commonsense. Investors should blame no one, but themselves if they do not recognise this.
A long term debt fund investor/saver will not be affected by such blips.
Everything in life comes at a price. If we want better post-tax returns then fluctuating returns are part of the deal. So we need to factor in when we need the money and how important the purchase is before we embrace this volatility.
Trouble is investors want to eat their cake and have it too! Tell them it is impossible they pretend like they understand and make the same mistake over and over again.
This is why I keep saying it is crucial to be contended investors. Before we invest or save, ‘how much returns will it fetch’ is the second question to ask, not the first. The first question is, ‘why should we earn a return?’. This question may sound dumb. However it makes us recognize ALL the risks involved in a financial decision.
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