For most part of 2012, the equity markets have been on a roller coaster ride. It has had its highs and its lows. And most of it seems to be difficult to predict. Investors have started to run helter skelter trying to make some sense of what is going on. Most importantly most of them are trying to figure out where to park their funds. How do they maximize returns? A leading daily has tried to answer this question. Their reply is invest in debt or bonds.
The underlying reason for this is that considering the dismal GDP growth numbers, the Reserve Bank of India (RBI) has little option but to cut interest rates. It is a known fact that bond prices are inversely related to interest rates. Therefore, if interest rates go down, bond prices go up. Thus helping investors earn more returns. However, in recent times, investors have side stepped bonds as an investment class. The reason for this was that given the high inflation levels, the RBI was forced to increase interest rates. The increase hurt the prices of the bonds. And most investors wanted to wait for rates to peak before parking their funds in debt. But most of these investors lost out as the RBI had cut down interest rates in its last policy meet. As a result, most of those who were waiting to call the peak of the cycle lost an opportunity to make money in the bonds.
The leading daily suggests that now is the right time for investors to pick up high quality bonds. And this would help them earn handsome returns over the next 12 to 24 months. This is earning high returns in the short term. But a question that we would beg to ask here is just like one cannot call the interest rate peak, how would one take a call on interest rate trough? What the daily has suggested for investors is to basically try and predict the interest rate cycle. And hope that in the short term the investor would get it right. This in itself is an extremely difficult task.
What investors need to do is to look at their long term returns. Short term blips should be treated as the name suggests. Short term. In the long term, equities have and will give the best returns. The volatile times that we are witnessing these days gives the rational investors the opportunities to pick up fundamentally strong stocks. That too, at good valuations. Investors would do well to pick up such stocks and maximize their long term returns. And leave the short term calls on complicated stuff like interest rate cycles to the economists and Central Banks. After all, it is their job.
The underlying reason for this is that considering the dismal GDP growth numbers, the Reserve Bank of India (RBI) has little option but to cut interest rates. It is a known fact that bond prices are inversely related to interest rates. Therefore, if interest rates go down, bond prices go up. Thus helping investors earn more returns. However, in recent times, investors have side stepped bonds as an investment class. The reason for this was that given the high inflation levels, the RBI was forced to increase interest rates. The increase hurt the prices of the bonds. And most investors wanted to wait for rates to peak before parking their funds in debt. But most of these investors lost out as the RBI had cut down interest rates in its last policy meet. As a result, most of those who were waiting to call the peak of the cycle lost an opportunity to make money in the bonds.
The leading daily suggests that now is the right time for investors to pick up high quality bonds. And this would help them earn handsome returns over the next 12 to 24 months. This is earning high returns in the short term. But a question that we would beg to ask here is just like one cannot call the interest rate peak, how would one take a call on interest rate trough? What the daily has suggested for investors is to basically try and predict the interest rate cycle. And hope that in the short term the investor would get it right. This in itself is an extremely difficult task.
What investors need to do is to look at their long term returns. Short term blips should be treated as the name suggests. Short term. In the long term, equities have and will give the best returns. The volatile times that we are witnessing these days gives the rational investors the opportunities to pick up fundamentally strong stocks. That too, at good valuations. Investors would do well to pick up such stocks and maximize their long term returns. And leave the short term calls on complicated stuff like interest rate cycles to the economists and Central Banks. After all, it is their job.
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