What explains the continuous redemptions that we are seeing in debt funds?
Investors are increasingly becoming risk averse. I am not referring to the Franklin Templeton fiasco. After the decline in interest rates, investors do not find it worthwhile to assume any unusual risk. So there is an extreme risk aversion. There are very few categories which are suited for risk-averse investors.
When we have an interest outlook like this, it is very difficult. The downside is much more likely than enhancing your returns. Everybody is becoming risk averse. The maximum exodus last month was from liquid funds and overnight funds, which are meant for risk-averse investors. The return in these funds have come to a point where many investors might leave their money in bank accounts rather than moving it elsewhere.
For those not in the high tax bracket, does it make more sense to invest in Senior Citizen Scheme, PPF, etc as the returns are higher than debt funds?
Yes, absolutely. They are giving a higher return. If you are not a tax payer, then all your return is tax-free income. Only when you cross a basic threshold, it becomes taxable. So once you have exhausted these avenues, then you will have to look for this. But for risk-averse investors, who have never invested in any market-linked investment, getting used to fixed income funds is definitely scary.
Given the low interest rate environment and the way inflation is inching upwards, do you think fixed income investments should be as low as possible and one should move more towards equities?
The only way to methodically deal with inflation is to be in equity because equity returns tend to get adjusted by inflation. For example, Maruti will make more profit because its unit price will get adjusted by inflation. To remain profitable, it will jack up prices. Profitability will increase and the stock price will go up. Inflation adjustment happens naturally in equity and not in fixed income.
In fixed income, individual investors are at a great disadvantage. The government has become the biggest borrower in the market. They are running huge deficits and to service that they have to borrow more. So unless there is a huge revival, the situation is unlikely to change. If the government is the biggest beneficiary of low interest rates, they are unlikely to let it go high.
Unless an investor embraces equity in a measured way where he can ride it with stability, he needs a great deal of handholding.
