Financial media tends to re-define 'safety' of asset classes every time there is a change in market sentiment. Prior to the financial crisis of 2008, even derivatives were sold as safe investments. Ironically the weapons of mass destruction have only made the case for so-called safe investments stronger. So much so, that post crisis, the adage of safety shifted from smallcap stocks to gold to finally debt funds. Many Indian investors who managed to sail through the crisis of 2008 lost their shirt betting on risky smallcaps. Gold then became the favourite asset class endorsed by financial media and banks alike. Once the sterling rise in gold prices halted and government cracked down on gold buying, even the yellow metal lost its luster.
The street then shifted focus to debt funds. Until last month every major financial daily propagated the wisdom of putting tons of money in 'safe' debt funds. Banks too were happy to tie up with mutual funds to propagate the safety of their debt funds. All they had to do was convince prospective investors that the RBI's move in the next monetary policy was a 'rate cut'. After all with the Finance Ministry breathing down its throat, the Reserve Bank of India (RBI) had little option! Reducing interest rates would be the most certain way to push GDP growth rates higher. And the cut in interest rates would be a blessing in disguise for the debt funds. Given the inverse relation between interest rates and bond prices, investors would not just keep their money 'safe' but also reap rich gains in a short time.
The promise of 'safety' and quick returns worked wonders for debt funds. Even while equity mutual funds saw lumpsum redemption, inflows into debt funds touched record highs. Brokers and advisors even convinced their clients to shift money from long term equity funds to short term debt funds. The dream run lasted only until the RBI's sudden rate hike caught both mutual funds and investors unawares. In its typical style the RBI chose to curb liquidity to stem the rupee's fall against the US dollar. The concern over higher rates impacting near term growth is not on the central bank's mind. Once again the RBI indirectly hiked the cash reserve ratio (CRR) for banks. These measures took the 'safety' quotient of debt funds to new lows. Investors who had been lured into them painfully realized that no investment is 'safe' if the underlying rationale is speculation as against fundamentals. Also those who chose to shift funds from long term equities did so at their own peril.
We wonder if investors would finally start evaluating riskiness of asset classes more carefully.
Please share your views at our Facebook and Twitter forums
The street then shifted focus to debt funds. Until last month every major financial daily propagated the wisdom of putting tons of money in 'safe' debt funds. Banks too were happy to tie up with mutual funds to propagate the safety of their debt funds. All they had to do was convince prospective investors that the RBI's move in the next monetary policy was a 'rate cut'. After all with the Finance Ministry breathing down its throat, the Reserve Bank of India (RBI) had little option! Reducing interest rates would be the most certain way to push GDP growth rates higher. And the cut in interest rates would be a blessing in disguise for the debt funds. Given the inverse relation between interest rates and bond prices, investors would not just keep their money 'safe' but also reap rich gains in a short time.
The promise of 'safety' and quick returns worked wonders for debt funds. Even while equity mutual funds saw lumpsum redemption, inflows into debt funds touched record highs. Brokers and advisors even convinced their clients to shift money from long term equity funds to short term debt funds. The dream run lasted only until the RBI's sudden rate hike caught both mutual funds and investors unawares. In its typical style the RBI chose to curb liquidity to stem the rupee's fall against the US dollar. The concern over higher rates impacting near term growth is not on the central bank's mind. Once again the RBI indirectly hiked the cash reserve ratio (CRR) for banks. These measures took the 'safety' quotient of debt funds to new lows. Investors who had been lured into them painfully realized that no investment is 'safe' if the underlying rationale is speculation as against fundamentals. Also those who chose to shift funds from long term equities did so at their own peril.
We wonder if investors would finally start evaluating riskiness of asset classes more carefully.
Please share your views at our Facebook and Twitter forums
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