Where to Invest Today -- Debt or Equity Mutual Fund Scheme

If you talk to any investor today where he wants to invest his obvious choice is Debt investment be it Fixed Deposit , Bonds , Debt MF . The reasons are clarity and assurance of some quantum of return vis a vis Equity products which on one hand have given poor return on historical basis up to 5 year period and also sentiments on economic and business front not so encouraging considering negativism and pessimism from all sides be the Government, Industries, Market movers etc . What is more disturbing that the players operating in equity side mainly AMC to a large extent they seems lot shaky on Equity MF product and has been mainly focussing on Debt product as it is easy to mobilise money from that side considering present day investment and sentiment .

No financial asset or Product can be categorised as Bad . All financial product have certain inbuilt risk and that was there 50 years back and will always be there because that is the basic characteristic of that product category . Risk in simplest terms can be defined as the variability in expected return . It is the economic situation that dilutes or magnifies the risks depending being in positive or negative stage .

Let us analyse present situation . A debt investor is happy to get 9-10% annualised return last 1 year but it has come on the backdrop of high interest rate . Why high interest rate ? because of high inflation , real return from debt side had to be positive so interest rate has to be more than inflation .  Is high inflation or high interest rate a positive scenario in a growing or developed economy . All developed economy have thrived on low interest rate last many decades so even if a debt investor feels he has gained a lot from his debt investment he has to remember it is an outcome from not so favourable economic situation . No business like high interest rate scenario as there is higher interest pay out and it eats their profit .

Debt investment is like a loan where entity with surplus gives at a some cost to entity with deficit which requires the money. The cost is called interest . Naturally one that gives money would like more interest and one that has to pay interest will like to pay as less as possible and balance is struck depending on credit worthiness of one which requires , time for which taken , nature of work for which money taken , and his level of urgency .  Its clear that the two parties involved look their respective gain i.e. interest rate in different direction and so expecting debt investment return always rising or very high is not at all possible on consistent basis . If you look historically return from debt investment is always range bound and mostly have been in 6-14% range on any time scale.

If I look in Equity Investment side , one with surplus puts money in business of the other entity ( through direct investment , buy shares , Equity MF schemes , PE etc ) . Here the objective is to partner for growth and more return. Interest  of both the entities is in same direction and not opposing each other .   If you look historically return from equity has big range in shorter duration but once moves in longer time duration it range gets narrow and moves in high positives which implies more assurance on quantum of return

Lets see two entities one big , proven business , track record of good sales, profit and then 2^nd entity small , not proven , no or less track record of sales , profit. If one does debt investment and evaluate from return and safety perspective he finds the first entity will be willing to pay at lesser interest rate for the money it raises from investor than the second entity so as an investor one gets more return from 2^nd entity but at the cost of safety of his money. So if safety was the criteria of investing in debt then investor has not acted wisely by loaning money to 2^nd entity . So it is a trade off between safety and return if you opt for which entity to loan or do debt investment with.

Again lets look from equity investment perspective – with whose business I would like to get associated . Obviously first entity as I stand to gain more in return from there than the 2^nd one. So if return and safety was the criteria for investment one has taken right decision on both parameter  .

Investing in any asset or product has to be done with proper conviction . One should know very well what to expect from the product in terms of return and how long to wait for it . The problem which has been is most investors take a trailing decision i.e. follow the experience of other in anticipation to feel the same . One has seen someone getting 50% return and seeing that puts the money expecting to get the same . It might happen or might not also. The 2^nd investor needs to see that in most case he has entered the upward growing return curve at the time when it has already reached some height and so one he has missed the opportunity which the first one has benefitted  and the factors which led so steep rise in first instance will it remain to be there ?. Return from equity comes from the business ( product, sales , profit ) and it is helped or negated  by economic situation positivity or negativity .

Returns from Equity Mutual Fund scheme and Debt Mutual Fund scheme are function of time . If one takes on time scale will find return from debt schemes  safe and its quantum assured and known for 0 to 6 month period which is total different in case of equity scheme which can range from negative to positive return, very high to low return . If again one takes 6 month to 2 year period return from debt shows similar behaviour but with some variability in quantum of assured and known return and in equity category the range of variability might be a bit lesser than first instance . Again moving from 2 year to 3 year or 5 year one will find more variability in assurance on quantum of return from debt side than the previous instance and in equity again lesser variability in return than previous instance.

Reason for above is that there is more risk in debt as time horizon is longer because of repayment risk , due to inflation interest rate can change so interest rate risk , due to change in interest rate there will be reinvestment risk of interest money . It is as simple as that if we give some one money we feel safe if the person say he will return money in 6 month than the person who says will return money in 6 years .  Whereas in equity mf investment if the business is doing well , products are getting sold more, profit is on rise then more positivity is created in the mind of all stakeholders be in consumer, promoter, investor and this adds for more concerted effort to drive further sales , revenue, profit and thus return to investor .

So the learning is variability in return and assurance of quantum of return from both Debt and Equity MF schemes moves in different direction on time scale. On lesser time horizon debt investment in better choice and in longer time duration equity investment is a better choice . The only dilemma is what is the long term . To me the level from which additional return from debt investment becomes negligible or there is return from equity balances that of debt and from this time horizon lesser possibility of return from equity going down vis a vis debt investment all incremental investment should flow in to equity mf scheme but the caveat is to have conviction , faith and patience .