In the last article, we saw that many investors are flocking to
mutual funds since the interest rates on fixed deposits have come down. So
often, the investors do not understand the risks and invest in equity related
mutual fund schemes, while shifting money out of fixed deposits, where the risk
levels are very different.
Someone wrote to us asking if the money may be shifted from fixed deposits
to debt mutual funds. Good idea. Both debt mutual funds and fixed deposits may appear
to have similar risk profile as both are debt assets. However, it would be
important to understand whether such an assumption is safe enough. ...
Click on the link below to read my article on this subject
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The English translation is as under:
In the last article, we saw that many investors are flocking to
mutual funds since the interest rates on fixed deposits have come down. So
often, the investors do not understand the risks and invest in equity related
mutual fund schemes, while shifting money out of fixed deposits, where the risk
levels are very different.
Someone wrote to us asking if the money may be shifted from fixed deposits
to debt mutual funds. Good idea. Both debt mutual funds and fixed deposits may appear
to have similar risk profile as both are debt assets. However, it would be
important to understand whether such an assumption is safe enough.
The big difference between debt mutual funds and bank fixed deposits
is the flexibility of investing. In case of fixed deposits, the tenure is
fixed, which means money is invested in a fixed deposit for a predefined time
period. On the other hand, an open-ended fixed income fund (or debt fund) does
not have a fixed term and hence money can be invested in a debt fund for any
time horizon. In the same scheme of a debt fund, an investor may come in for
one year, whereas another might have invested for two years. This has some major
implications: each fixed deposit is treated as a unique product, whereas debt
funds are pooled investment vehicles.
When investors can come in and get out of the scheme on any business
day, there must be a mechanism to offer fair price to each. This price is
linked to the NAV of the scheme, which is calculated on a daily basis. Since
the NAV is dependent on the daily market prices of the securities in which the
scheme has invested, the same may be subject to fluctuations as per the
investments made.
This exposes a debt fund investor to daily fluctuations. Due to
this, the investment returns are unpredictable for an investor in a debt fund.
On certain occasions, some schemes may also see drop in the NAV for brief
periods of time – yes, it is true even for debt funds. (We have written about
this in some of our earlier articles and hence one should take care to choose a
debt fund scheme that is appropriate for one’s situation).
An investor does not witness such uncertainties or fluctuations in a
bank fixed deposits. An investor coming in a debt fund must understand this.
This is where it becomes crucial to understand that all mutual funds
are not the same, and also that all debt funds are not the same. There are
various types of debt fund schemes, suitable for different needs of investors.
If you make a proper choice, there are reasonably good chances that you would
get good results.
Knowledge is power – understand debt funds and then invest. After
all, if you understand and choose well, mutual funds sahi hai.
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