Investors Cannot Eat Their Cake And Have It Too!

Published: July 19, 2013 at 9:27 am

Last Updated on

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.

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A long term debt fund investor/saver will not be affected by such blips.

The Serenity Prayer

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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About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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    1. “do nothing except read and learn” is one possible answer! I am trying to picture your inbox now and wow that must be one crowded place!

  1. hi pattu! the thought lingering in mind for quite some time and you have aptly presented.well done. and the first question can be ‘‘why should we earn a higher return?’ bye, ravichandar

  2. Dear Pattu, I am visiting your self-hosted blog for the first time (I believe it was earlier on First let me congratulate you for the nice layout and design…its quite soothing..

    appreciate also the idea and thought of your post on why investors should be undeterred by the volatility. I believe the volatility is coming as a big surprise to investors who have been sold to investors as no-risk and guaranteed return products.

    Volatility is here to stay for debt MFs – investors should understand and appreciate that, but keep their reasons for investing in mind, not get swayed by the return expectations. Your post has created good awareness in this direction.


  3. Dear Pattu,
    Need your advice on the following:My friend who already has substantial investments in MFs(equity and debt) has additional funds of Rupees One Crore to invest in MFs(or any other better alternative,if available). He feels that the current action by RBI is God-sent and he should take full advantage of the same by taking full exposure to debt funds with this additional investment.I could think of 3 or 4 MF Schemes-1) TI Income Builder Plan A-G,2) SBI Dynamic Bond-G,3) Reliance MIP-G and 4) TI Low Duration Fund-G.I am not sure of the last 2-whether they are worthy investments at this stage.Or,for that matter,I have an open mind about all the Schemes suggested by me.He will certainly not redeem the funds before completion of 1 year(tax-angle) and even after that redemption,if any,would be mostly on considerations of very poor performance or a less-likely need for funds.Would be grateful for suggestions and the possible way forward.Thanks.

    1. Dear Sundaram,

      Thanks for writing.
      With the exception of TI Income Builder Plan A-G, the other funds should not be used for periods less than 1 year. I suggest that 10-15% be invested in this fund and rest divided among the other funds. Since the experts believe the current situation will prevail for a few months is it best to invest the amount over a period of few months to handle volatility if any.
      The other investments should not be touched for 2-3 years so that they can deliver.
      yes this is a good opportunity but further decrease in NAV can hut the present investment. So some caution must be exercised.

  4. Thanks,Pattu.
    No investment will be redeemed in less than 1 year(as already posted in my original query). The 4 funds were suggested by me based on my limited knowledge.Do you feel that any other or lesser number of funds would be preferable?If so,please suggest the names and the proportion to be allocated to each fund.

    1. My point is that investments in all fund except the TI fund should be allowed to grow for 2-3 years to realize the potential. So unless the time frame is clear we need to understand there is loss of capital risk.
      Look at the average maturity value in the portfolio page of each funds VROnline link. The investment duration should roughly match this. If you redeem well before this, gains maybe lower.

      the funds you selected are pretty decent. however I would like to repeat that duration of investment is crucial.
      You can also consider
      Templeton India Income Builder (2.8 yrs avg maturity)

  5. 1) Sorry,Pattu,but I’m unable to comprehend the last line.TI IBA is already one of the 4 funds.Am I missing something?

    2) In your first reply,you had mentioned that TI IBA can be used for a period of less than 1 year whereas it’s avg. maturity is 2.8 yrs.I guess there has been a mix-up between TI Low Duration Fund and TI IBA(both of which were part of my first list of 4 Funds) and what you actually meant was that TI Low Duration Fund could be used for a period less than 1 year and can be allocated 10-15% of the funds.Kindly confirm.

    Thanks for your time and help.

    1. Sorry.
      Yes you are correct about (2). A small allocation to TI Low Duration Fund which can be used for less than a year.

      Reg. (1) big goof up. Apologise. I wanted to say TI IBA has a maturity duration close to what you have in mind.
      I also wanted to say
      funds like
      Canara Robeco Income (avg. maturity 6+ year) have a good record above 5 years.

      Somehow things got to mixed up.

      In my view debts fund outperform FDs only when you stay invested for a long time. For short durations (in this context, about 2 years or less) I would prefer FDs. I have to pay more tax but can sleep in peace.

  6. Never mind the error-it’s human to err and with your busy schedule,it’s totally acceptable.Thanks for the knowledge and guidance.

  7. From the recent(past fortnight)RBI action plans,I see,there seems to be a shift in RBI,s priority.The priority now seems to be Re-Dollar exchange rate.Earlier it was inflation control.In the efforts at arresting the deep fall of Re against Dollar,RBI does not mind that it may result in a higher inflation rate. Days of higher Bank Rates seems to be in the horizon.Higher borrowing costs from RBI may compel Banks to look elsewhere to borrow.Will this result in higher Bank FD rates?

    1. Dear Ramamurthy,

      I am clueless in such matters. If we have a good monsoon all over the country then inflation may not be so high. So I would not expect too much hike in rates. You can perhaps get a more intelligent answer here

      Thanks for visiting and commenting.

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