Debt Fund: Are they creating wealth in long term...

This is what has catalyzed thoughts after seeing a leading Mutual Fund advertisement that is advocating investment in Debt Funds to generate long term wealth.  Yes.. last one year and five years returns are in double digit as interest rates are coming down. Make no mistake, though banking deposit and lending rates are still high by any yardstick, however, interest rates are coming down on Government Bonds and Corporate Bonds due to sluggish economy & as RBI reducing policy rates. This makes a case for investment in debt funds. But, is there any further room for additional fall in policy rate so to maintain double digit return through debt funds.

It is expected that we would be witnessing sluggish economy and consequently waning pricing power of the producers in the current financial year. This will help maintaining lower inflationary expectations. This will aid interest rates to remain low for the at least next one year before economy rebounds and put a floor on further fall in rates.

This makes a case to stay invested in debt funds at least for the foreseeable future. However, it is pointed  out that debt fund can not generate long term next egg. What is that means, it will not be able to generate inflation adjusted real return in the long term the way equities can do. There would be a point when inflation would be stable in India in the range of 5%-6%  and in such scenario they might be able to deliver just above inflation, falling short of expected long term real return.

Happy investing and lets us build long term nest egg..

Next publication would be on June 8, 2013 due to summer break...

  

Savers dilemma: How to generate real return...

 

 

Savers are in consistent dilemma about how to generate real return for there long term savings. Financial planners are suggesting only way to generate real return through investment in equities. It is expected that you should invest early in equities & as you progress in the life, you should keep reducing the proportion in equities while raising fixed income to lock in return.  Is this the panacea of real return....

It is easier said and sold to the gullible investor than to achieve the desirable goal. To give an example, for last 5 year, Indian equities have give only 5% return. It is often cited that in the long term equities will always give real return. However, there are instances like in China, where returns are hardly to talk about despite superlative economic growth. 

 

The answer lies somewhere in between. One has to start investing only in diversified equity funds while not succumbing to the lure of sectoral / theme based funds as they will do well only when that theme is in vogue.

 

Another important thing a common investor is missing is to follow up after investing hard earned money. What a person can do is to at least read couple of economic dailies to keep oneself abreast with latest happenings and trends in the economic and global environment. This will assist you to decide when to encash your gains to lock the same in fixed income. Here again one should be practising Systematic Withdrawal Plan ( SWP).  It is a tool to keep withdrawing gains to invest in the fixed income assets to meet your financial goals. In fact financial planners mostly fails to emphasise on SWP as they are commission oriented to maintain your investment or try to switch to other equally risky investment. Therefore it is in your interest to understand when market is expensive in terms of valuation and it is time to encash gains.

 

Meanwhile as suggested in the last week that airlines will be doing creative crazy things to boost there coffers came alive. One of the airline has decided to price even middle seat as well. This means are they selling tickets to fly standing in the plane as one may not be willing to pay additional fee for seat..

 

 

 

 

Inflation... It is all around...

Inflation is the phenomenon which is eroding Indian purchasing power for last four years. India is unable to get over from the impact of global financial crisis. This has led to worsening of leading indicators like Fiscal and Current Account Deficit, Interest Rates etc which is reflecting in  sub par growth, low employment  and mostly into persistently high inflation. This psychology is so well entrenched in the society that when ever you go out to purchase any goods or services, it is invariably high and that too with questionable quality.

 

Now, let me put focus on how government itself is further strengthening the vicious circle of inflation. Railway ministry has recently decided to round off the increased rail fare to next multiple of Rs. 5/. This is nothing but day light robbery. On the other hand, notes of lower denomination up to Rs. 5/ are no longer printed and this is also creating hassle to carry loose coins. This is also effectively moved now everything in the multiple of Rs. 10/. for whatever goods or service you would like to buy. Thus we are artificially creating and strengthening  the tentacles of inflation across the society and country. The day is not far away when your taxi and cab will also charging in the multiple of Rs. 10/ in line with railways. 

 

In addition, there are doubts that airfare will become come down with segregation of the services. Airlines would find ways to sustain current fares while coming out with dubious charges like web transaction service charge  to boost there coffers. On the similar line, websites like Bookmy show.com levy service charge while booking tickets. It is highly objectionable as a consumer of the service I am entitled to buy ticket at what it is available to box office. In fact till some time back  none of the website was charging any service charge. This should be vehemently opposed at every forum. All this further adds up to your inflation.

 

This persistent inflationary pressure has created dilemma for savers. Bank deposit rates are low in the light of consumer inflation. This is what reflected in the lower deposit collection of the banks over the years as savers are wise enough to diversify away to other asset class where they can expect real returns.

 

It is high time that we as citizens of India stand up and start raising our voice to the government to control the inflation. It can happen if they control wasteful expenditure, increase productivity and most of all reduce bottleneck to augment resources. 

 
 More in next column...