You might have relied on fixed-income investments for a steady income along with your salary at some point in your life. You may even think that they are the safest bet to get returns in today’s volatile financial scenario. In this article, we will address some prevailing fallacies about fixed-income investments.
1) Fixed Income Assets Are Enough to Generate Wealth
In contrast, equity mutual funds give you a yield of 10-15% interest per annum. You can see that the difference of interest rates given between fixed-income investments and equity mutual funds is quite high, with equity mutual funds ruling the roost in terms of the return value.
Therefore, one can see that it is not possible to generate enough income from fixed-income assets alone in the longrun. By limiting yourself to fixed income instruments you would be doing a great disservice to your assets by depleting them in the long run in real value although their absolute value would remain the same.
Hence, it is wise to invest in equity mutual funds, or other equity-based funds to generate wealth in the long term.
2) Fixed Income Instruments Don’t Pose Any Risks
Fixed-income investment options might have been the safest option guaranteeing significant returns maybe some 30 years ago. But this is not the case anymore.
- In today’s day and age, no investment option is risk-free.
- Fixed deposits have reinvestment risk, which means you might not get the same amount of interest on renewal after maturity.
- There is the risk that your returns from fixed-income assets won’t beat inflation rates. This is the inflation risk.
- Even Public Provident Funds are no exception as regards to their risk potency as their rates are being benchmarked to government security rates.
- Furthermore, there is the risk of the inability to liquidate your fixed-income deposits during the lock-in tenure. This is called liquidation risk.
- Also, there is the interest rate risk, which means changes in interest rates that adversely affect your returns from fixed-income assets.
3) Your Age Equals the Percentage of Your Investment in Fixed Income Assets
There is a general consensus among financial advisors about the percentage of investments in fixed deposits that their clients are advised to have. There is a general rule of the thumb that says that the client’s age should match the percentage of the amount invested by them in fixed income instruments.
For example, if you are 30 years old, your stake in fixed deposits should be 30%. While this might give a cut and dried solution to the investor, this is not the best approach. Every investor is a unique individual with different levels of risk appetite, financial goals, health concerns, and financial position.
A man at the age of 28 is aving money for his sister’s wedding which is planned 3 years from now. As 3 years is a short term, he needs to invest in more of fixed income investments. But as per the thumb rule, he needs to invest only 28% in fexed income. However, his personal situation demands more fixed income investments.
Another man at the age of 65 is building a portfolio for his grand son’s education which is 18 years from now. As 18 years is a long term, he needs to invest in more of equity investments. But as per the thumb rule, he needs to invest only 40% in equity. However, his personal situation demands more equity investments. The point to note here is that age and investment in fixed deposits don’t always go hand in hand. They may vary depending on your needs, goals, and risk appetite.
Keep in mind to keep your portfolio diverse and maintain a healthy balance between equity funds and debt funds.. Do not hesitate to consult a financial advisor for this purpose. A well-diversified and balanced portfolio is the solution for maximizing returns while cutting down on liabilities and risks.