Success formula for Investing

As novice investors, many of us are fascinated by successful Investors. We want to invest in next big idea, the best fund or in some strategy which will yield us an extraordinary return. We start searching the internet and right from Warren Buffett to Porinju we see people who have made big money in the capital markets and try and replicate their success formula.

What is Important is Understanding why, what, where, how?

As a novice investor one needs to understand why is he/she is investing? What is the time horizon? Where is one investing? What suits one’s personality? How one should plan and execute? And many more.

Capital markets is a dynamic place which is influenced by hundreds of factors every second. There are tens of asset classes, thousands of products to choose from. Every asset class has different characteristics and provides good/bad returns in different time frames.

“Understanding cycles and having the emotional and financial wherewithal needed to live through them is an essential ingredient in investment success”

Howard Marks

But again not everyone can do it successfully and mistakes have big costs.

Important thing to understand is, generally many of us are not full-time investors and we need professionals to guide us through market volatility. This said, there are some basis rules which can help you make money successfully.

Basic framework for successful investing

  1. Identifying Time Horizon for Different Needs and Investing Accordingly – Identifying Short, medium and long term needs and allocate money accordingly.
  2. Following Asset Allocation Discipline – Not putting all eggs in the same basket, and more importantly reducing exposure in particular asset class when it is overheated and investing in an asset class when it is underappreciated helps.
  3. Determining What Investment Strategy Works for You – Understanding what strategy suits your personality or in other words, matching your ability to take risk with your willingness to take risk is important. Investing in something which causes sleep loss at night is not at all worthy. 
  4. Emotional Discipline – To be a successful investor you need to have emotional discipline. Behavioural biases erode wealth big time, you need hand-holding by someone who understands these biases and will guide you to the right path.
  5. Be Willing to Learn – The market is hard to predict, but one thing is certain: it will be volatile. Learning to be a successful investor is a gradual process and the investment journey is typically a long one. At times, the market will prove you wrong. Acknowledge that and learn from your mistakes.

Happy Investing !

Primer on Debt Funds

What are Debt Funds?

  • Debt funds are those funds which invest predominantly in various types of debt and money market securities like treasury bills, government securities, corporate bonds, commercial paper and certificate deposit.
  •  In general the debt securities have a fixed maturity date and pay a fixed rate of interest. The returns of debt mutual funds come from two avenues viz. interest income and capital appreciation/depreciation based on market value of the securities.
  • Every debt security is assigned a credit rating helping us to assess the capacity of issuer to repay the debt/loan.

Why Debt mutual funds

  • Debt funds offer investors to participate in debt markets of India with small ticket size. Variety of debt funds running different strategies are available.
  • By investing one debt scheme one holds ~30-40 different securities issued by different issuers like Government of India, State Government, Big Corporate and Banks. The choice of securities is made by professional Fund Managers having vast experience in the field of credit analysis, fixed income security analysis.
  • Usually the returns are not impacted by volatility in equity markets. Thus due to less volatility, debt mutual funds should bring stability to overall portfolio returns.
  • Liquidity need can be met through open-ended structures, although exit loads may be applicable in some cases.

Different types of Debt Funds

There is a wide range of debt mutual funds; suitable to invest depending upon investment horizon and capacity to take risk.

Other than the ones mentioned above there are close-ended debt funds. These include Fixed Income Plans (FMPs) having fixed tenure and interest rate.

Capital protection funds and multiple yield funds also form part of Debt mutual offerings.

Factors affecting returns

Some of the factors which may influence the performance of debt funds are listed below

  • Interest rate scenario-Domestic & Global markets
  • Inflation
  • Liquidity in money market
  • Monetary Policy stance/ Regulations by the RBI, Government of India
  • Growth in economy and overall macro-economic situation

Risks in Debt Mutual Funds

  • Credit risk – Impact due to credit migration or default risk
  • Interest rate risk – Impact on price of a bond due to changes in interest rate changes.
  • Liquidity risk – Inability of the fund to sell its investments and meet redemptions of investors due to poor market conditions 
  • Re-investment risk – Inability to reinvest cash flows (e.g., coupon payments) at a rate comparable to the current investment’s rate of return.