DON'T IGNORE INVESTING IN FIXED INCOME.

[Courtesy: Dhirendra kumar in The Times of India dated 01st July, 2019 (Monday)].
"Even the most diehard equity fans must ensure that at least some of their investments are in fixed income options".
I have often lamented Indian savers' excessive reliance on fixed income. Generations of savers have automatically turned to savings instruments such as PPF, bank deposits, post office deposits, etc., for their savings and investments must be invested in euqity or equity-backed mutual funds. Interestingly, it increasingly looks like that a certain proportion of younger savers have taken the equity mantra a little too seriously. Savers who start investing in equity funds and have a good experience tend to invest all their saving in equity funds. This is a mistake, as it goes against the concepts of asset allocation and asset re-balancing. These concepts may sound complex but can be understood easily in three steps. One: broadly, there are two types of financial investments - equity (shares) and fixed income (deposits, bonds, etc.). Two: equity has a higher gain potential and more risk, while fixed income offers lower but steady gains. You should be investing in the two in a decided proportion. This proportion, and the process of arriving upon it, is called asset allocation. Three: as time goes by, equity and fixed income gain at different rates, disturbing one's desired asset allocation. Shifting money between the two to restore allocation is called asset re-balancing. That's it. Why does this asset allocation strategy work? The basis for asset allocation is the two types of financial assets - equity and debt - are fundamentally different. But they are also complementary. In terms of conflicting need of investments to give high returns and high safety, each asset class plays a role that fills the other's deficiencies. 
There are just three ways an investment can make money. One, by lending money to someone who pays interest on it. Two, by becoming a part owner of a business, as in having a share in it. Three, by buying something that becomes more valuable, like gold or real estate or indeed, any possession. Equity grows faster than debt, but is much more volatile. There are times when it will rise much faster than debt, and there are times when it will grow slower, and will fall. The best way to protect oneself from this volatility - even take advantage of it - is by deciding the percentage amount to invest in equity and debt respectively. Then, stick to this allocation by periodically shifting money away from the asset whose allocation gets higher into the asset whose allocation gets lower. When equity grows faster than fixed income - which is what one expects most of the time - you should periodically sell some equity investments and invest the money in fixed income so your portfolio's balance is restored. When equity starts lagging, you sell some of your fixed income and move it into equity. Thus by maintaining the preferred asset allocation your portfolio returns will be relatively stable. 
There is practically no case for anybody to not invest in fixed income at all. The only question is what kind. For individuals who like to keep it simple, the entire thing can be done through hybrid mutual funds. The asset balancing and allocation all happens transparently and effortlessly in these funds. Even the traditional favourite, Public Provident Fund (PPF), is not a bad choice because it provides tax savings as well as tax-free returns, although the very long lock-in period of PPF is problematic. No matter how completely you have bought into the equity story, and what route you take, some fixed income investments are a must for everyone.
-Challapalli Srinivas Chakravarthy, 24th August, 2019 (Saturday)-
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