Debt Fund or Banks like PMC – Where to invest?

Diversity is essential to a healthy financial portfolio. It’s true, the old adage “don’t place all of your eggs in one basket” applies to investment banking. However, there are those who remain skeptical about Debt Fund Investment and diversifying their portfolio in comparison to FD’s in the bank . Yet, a paradigm shift is upon us,  Debt Fund Investment is becoming more popular among investors and individuals in today’s time.   

As a Certified Financial Planner, I intend to debunk the myth that only low yield saving accounts are a safe investment and introduce Debt Fund as an alternative emerging avenue. Agreed, during late 2018. giants like IL&FS,  ZEE Entertainment, and DHFL entered a state of crisis and were tagged as interest defaulters, this caused the panic in the debt investment category and investors started redeeming funds.  However, their principal amount was not affected and still redeemable. Despite this event, 70% of investors have neglected to diversify and continue to warehouse equity solely in banks, a foolish idea, especially in light of the recent Punjab and Maharashtra Co-operative Bank (PMC Bank) debacle. 

Banks, contrary to popular belief, may default, when this occurs, all accounts are frozen. For example, recently,  the RBI (Reserve Bank of India)  imposed operational restrictions on Punjab and Maharashtra Co-operative Bank (PMC Bank). These operational restrictions continue to cause panic among account holders. Account-holders are only allowed to withdraw 1,000 INR per account. Regrettably, those who neglected to diversify their financial portfolio are left with little in hand. However, those who diversified and invested in debt funds had a plan-B. 

What is Debt Fund Investing? Debt Fund is much like Mutual Funds, it is a pool or exchange-traded fund. These investments are as safe as investing in savings and yield an average of 6%. Luckily, the fee ratio on Debt Fund Investing is lower than that of Equity Funds due to an overall lower cost of management. Furthermore, investors may choose short-term or long-term bonds, securitized products, money markets, money instruments or floating rate debt too.  

Don’t worry, much like depositing money in a bank, the capital is safe, for this reason, Debt Fund Investing has gained popularity. Additionally, the capital may be withdrawn at any time. If the investor has diversified, 100 INR for example, among different companies, government bonds  or debentures,  and if there is a loss of 2 INR from one bond or debentures, the investor still may redeem 98 INR, anytime, whereas at the bank the investor’s 100 INR becomes under-lock-and-key until the scrutiny has passed, as is the case with Punjab and Maharashtra Co-operative Bank (PMC Bank) .

Debt Fund Investing is among one of the wisest investment avenues. However, in general, a diversified portfolio will weather the investor through any storm. Often, I speak to clients about a diversified portfolio, they respond with “banks are most likely the safest option,” yet, unforeseen tragedy may strike anywhere, at any time.