In his recent article 'Why investing is not only about equity' in The Economic Times, Mr. M Pattabiraman, Associate Professor at IIT Madras, has expressed deep resentment and displeasure at fixed-income investors being labelled as financial illiterates.
He argues that many investors want to play safe with their money. And, they should be allowed to do so, without being humiliated or made fun of. Why should financial advisers look down upon those who prefer FDs to equities?
I strongly disagree with his remarks and opinion expressed.
But, wait!
Before you get any wrong ideas.. listen to what I have to say.
I fully appreciate and totally agree with this decision of many investors. If they are averse to investing in equity, that's perfectly normal and fine with me. I do not, in any manner whatsoever, wish to demean them or discredit their choice of limiting their investments to fixed-income products only.
However, I still emphatically state that many such investors are utter financial illiterates. [For that matter, not just the fixed income investors, even many equity investors are absolute financial illiterates. But that's another story.]
And, I do so with the most honest intentions... hoping that they could someday become "better" fixed-income investors.
Because, at present, they are making a blunder with their choice of fixed-income products.
Fixed Deposits and Insurance are their all-time favourite options. And yet, both are terribly atrocious choices.
Fixed deposits are fine for the investors in nil or 10% tax brackets. But, for investors who pay 20% or 30% tax, fixed deposits are like committing financial harakiri.
Interest income is taxable at the marginal income tax slab rate of the depositor. So even if your FD offers you 8% p.a. interest, effectively only 5.6%-6.4% comes into your pocket. This, by no means, can be considered as acceptable returns.
It does not cover even the inflation!
In other words, your capital may be safe and appreciating drip by drip. But, it is absolutely useless, if things around you turn costlier day-by-day. So much so that after a few years, you just can't afford them. What's the use of this safety then?
Unfortunately, this story doesn't end here:
Most fixed-income investors, often invest in fixed deposits of dubious companies and co-operative banks. Why? Because these offer a few extra percent returns. This, despite being fully aware, that numerous depositors have "repeatedly" lost crores of rupees in such suspicious, unreliable and dishonest schemes. Doesn't this show their utter lack of even the common sense, forget about financial literacy?
By the way, I would love to know just how many of them have heard of something called Credit Rating. (Very few, I can guarantee.)
Insurance policies are worse. The returns again are pathetic, at just about 4-6% p.a. (of course, tax-free). In addition, liquidity is terrible. If you need money before maturity, you have to pay hefty surrender charges.
So, where can fixed-income investors "safely" invest their money (with better post-tax returns and high liquidity at zero cost)?
Answer: Debt Mutual Funds.
Debt mutual funds score over insurance and fixed deposits on all counts – safety, liquidity, returns, tax efficiency, risk diversification and more.
Yet, because of their mental block, very few fixed-income investors are willing to look at, what is undoubtedly a far (far) superior fixed-income product.
While crores and crores of rupees have been lost in dubious fixed deposits and insurance schemes, the loss from debt mutual funds is practically speaking zero. And this is not about last one month or one year or even one decade. This is true over the last 20 odd years.
What more proof of 'safety' of debt mutual funds, do the 'safe' investors want?
Last but not the least:
Would you be happy if your children choose a “sub-standard” college (instead of an IIT or IIM), just because they are too lazy to put in extra efforts. Will you skip putting them through extra classes, where they could become better students and crack the IIT / IIM exam? Will you accept this below-average choice of theirs?
If yes, then I rest my case.
If not…
… then what right do YOU have, to make “sub-standard” investments? Why don’t YOU take extra lessons, to become a better fixed-income investor?
In this regards, I reiterate:
“Managing money is really (really) simple. Even a school child can master it. I guarantee that you will find it lot easier than trigonometry and calculus; chemical reactions and equations; Newton’s and Einstein’s laws; etc. that you studied in school.”
For those willing to become a better fixed-income investor, the following blog posts would be quite useful:
How to earn tax-free risk-free income
How To Select The Low-Risk High-Yield Debt Funds
Simple and Smart Strategy to Buy the Best Debt Funds
Besides, I am always there, to guide you to make the best investments.
He argues that many investors want to play safe with their money. And, they should be allowed to do so, without being humiliated or made fun of. Why should financial advisers look down upon those who prefer FDs to equities?
I strongly disagree with his remarks and opinion expressed.
But, wait!
Before you get any wrong ideas.. listen to what I have to say.
I fully appreciate and totally agree with this decision of many investors. If they are averse to investing in equity, that's perfectly normal and fine with me. I do not, in any manner whatsoever, wish to demean them or discredit their choice of limiting their investments to fixed-income products only.
However, I still emphatically state that many such investors are utter financial illiterates. [For that matter, not just the fixed income investors, even many equity investors are absolute financial illiterates. But that's another story.]
And, I do so with the most honest intentions... hoping that they could someday become "better" fixed-income investors.
Because, at present, they are making a blunder with their choice of fixed-income products.
Fixed Deposits and Insurance are their all-time favourite options. And yet, both are terribly atrocious choices.
Fixed deposits are fine for the investors in nil or 10% tax brackets. But, for investors who pay 20% or 30% tax, fixed deposits are like committing financial harakiri.
Interest income is taxable at the marginal income tax slab rate of the depositor. So even if your FD offers you 8% p.a. interest, effectively only 5.6%-6.4% comes into your pocket. This, by no means, can be considered as acceptable returns.
It does not cover even the inflation!
In other words, your capital may be safe and appreciating drip by drip. But, it is absolutely useless, if things around you turn costlier day-by-day. So much so that after a few years, you just can't afford them. What's the use of this safety then?
Unfortunately, this story doesn't end here:
 |
| Don't waste any moment or you may have to pay a high price for financial illiteracy. |
Most fixed-income investors, often invest in fixed deposits of dubious companies and co-operative banks. Why? Because these offer a few extra percent returns. This, despite being fully aware, that numerous depositors have "repeatedly" lost crores of rupees in such suspicious, unreliable and dishonest schemes. Doesn't this show their utter lack of even the common sense, forget about financial literacy?
By the way, I would love to know just how many of them have heard of something called Credit Rating. (Very few, I can guarantee.)
Insurance policies are worse. The returns again are pathetic, at just about 4-6% p.a. (of course, tax-free). In addition, liquidity is terrible. If you need money before maturity, you have to pay hefty surrender charges.
So, where can fixed-income investors "safely" invest their money (with better post-tax returns and high liquidity at zero cost)?
Answer: Debt Mutual Funds.
Debt mutual funds score over insurance and fixed deposits on all counts – safety, liquidity, returns, tax efficiency, risk diversification and more.
Yet, because of their mental block, very few fixed-income investors are willing to look at, what is undoubtedly a far (far) superior fixed-income product.
While crores and crores of rupees have been lost in dubious fixed deposits and insurance schemes, the loss from debt mutual funds is practically speaking zero. And this is not about last one month or one year or even one decade. This is true over the last 20 odd years.
What more proof of 'safety' of debt mutual funds, do the 'safe' investors want?
Last but not the least:
Would you be happy if your children choose a “sub-standard” college (instead of an IIT or IIM), just because they are too lazy to put in extra efforts. Will you skip putting them through extra classes, where they could become better students and crack the IIT / IIM exam? Will you accept this below-average choice of theirs?
If yes, then I rest my case.
If not…
… then what right do YOU have, to make “sub-standard” investments? Why don’t YOU take extra lessons, to become a better fixed-income investor?
In this regards, I reiterate:
“Managing money is really (really) simple. Even a school child can master it. I guarantee that you will find it lot easier than trigonometry and calculus; chemical reactions and equations; Newton’s and Einstein’s laws; etc. that you studied in school.”
For those willing to become a better fixed-income investor, the following blog posts would be quite useful:
How to earn tax-free risk-free income
How To Select The Low-Risk High-Yield Debt Funds
Simple and Smart Strategy to Buy the Best Debt Funds
Besides, I am always there, to guide you to make the best investments.
