Investor woes on debt mutual funds [FB Chat]

I had written earlier on why you should buy debt mutual funds now given the July 16th carnage. Here is humorous take on the impact this had on an ordinary investor.

Note that I am using the Facebook Chat Wall for this purpose and want to hastily add a disclaimer that this is not meant to show anyone in bad light. Consider this a spoof that is intended not to harm or disparage anyone.

Let me know via comments whether you like this or not and I will try to improve upon this in the future.

Debt Mutual Funds-

Debt funds are much more predictable than equity funds

As far as the perception that debt funds are difficult to match with investment goals is concerned, I have the exact opposite view. I think that, it is much simpler to match debt funds with investment goals compared to equity funds. Let me explain. There are different types of equity funds based on market capitalization strategy of stock selections, e.g. large cap funds, multi-cap funds, mid and small cap funds etc., each with its own risk / return characteristic. How do I know, which fund is suitable for my investment goal, other than subjective notions with regards to my risk appetite? Further, there are funds based on different investment styles like growth, value, growth at a reasonable price (GARP) etc. How do I know, which investment style is better suited to my investment goals? What I am trying to say is that, there is a considerable amount of subjectivity involved in choosing the right type of equity fund for a specific investment goal.

On the other hand, I can be highly objective in choosing the right type of debt funds for specific investment objectives. This is because fixed income investment is more mathematical (analytical) compared to equity investment. Let me explain with a help of an example..

Let us assume that a debt fund has a Yield to Maturity of 8%, Modified Duration of 3 years and high credit quality. Regular readers of our blog may be familiar with concepts like Yield to Maturity and Modified Duration, but if you are not, do not despair; we will explain these concepts soon. If the interest rate changes by 0.5% (up or down) in the next 12 months, then we can with a fair bit of confidence that the return will be in the range of 6.5% to 9.5% (ignoring expense ratios for the sake of simplicity). Readers should note that, there was no expert judgement involved in our estimation of debt fund returns; it is driven by bond mathematics, which we will explain later. Moving on equities, can anyone say, with any reasonable degree of confidence, how much return will a multi-cap equity fund give in the next 12 months? The answer, very likely, is no.