Characteristics Financial Assets

MF, Debentures and Direct Equitry as investments

Mutual Funds

Bonds/Debentures

Direct Equity

Return Expectation

Certain small cap and micro cap schemes have given very impressive CAGR returns over 5 years of ~25% p.a.
Moderately aggressive schemes have also fetched a healthy 12 % p.a.
Debentures of sound companies on an average give around the same returns as that of Conservative Funds.
These are instruments that are meant for safe investments and therefore fetch a very modest return.
Equity Investments have the ability to fetch very high returns over time. But the volatility of such returns is very high too.

Interest Rate

High in Debt MFs
Medium risk in Equity MFs
High Risk Relatively Low

Credit Risk

In Debt MFs the risk of loss of capital is minimal. Whereas in some micro cap or small cap equity schemes do have such a risk Relatively very low
It could be medium risk in case of Debentures depending on the type of company
Loss of the principle capital very much exists in Direct Equity Investments. Investors should have thorough understanding of the markets and experience before investing in equity.

Inflation Risk

Certain Debt schemes have this risk as they usually give a post tax return on the capital that barely beats the inflation in the economy Debentures are better options than Bonds in this case. But Bonds are tax free. But both still have a fair risk of Inflation drawing down their returns Equity is easily the best option in such a case. The inflation risk to the investment is the lowest

Market Risk

Medium. The effects of recession are felt on aggressive equity schemes that depend on the rally of the market for returns Relatively Low. Only Debentures that have a low rating are prone to such risks. High risk of market Risk. No matter however good an investment is, if the overall economic and global political conditions aren’t favorable, then direct equity investments may have a huge draw down.

Necessary Conditions for the Investment

History of the Fund Manager and the Past Performance of the Scheme. Sound Financial Health of the company is important for the Debentures. The Credit Rating of Bonds is also a must watch Sound Financial Health of the company. With moderate to large potential of growth in the medium to long term.