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. |