Do you think debt schemes/income schemes of Mutual Fund are 100% safe. The redemption is T+1 so, when ever you need money, its available for redemption.
Hold your answer for time being.
Let me put it differently, if you understand the risk associated with Mutual Fund Investment : Do you know, why few debt schemes have slightly better returns? or Even Treasury Schemes (Liquid Plans) are not 100% safe. Normally, while investing, we look at only Fund House and do not care to read the finer points. Investment in AA papers is as good as AAA papers, and rating hardly matters. Right.
As we know, the return we get from any Investment is directly linked and in proportion to the risk we undertake. Its called the Risk Premium. Seldomly, in real life, we understand the actual risk. We only perceive the risk. Neither statisically, we understand the actual percentage of risk. And therefore, we agree on lower return in debt/income fund v/s equity fund, ( return of 8-9% – pre tax vs/ 12% – post tax ) assuming and naively believing that risk associated is very low as compared to equity funds. Thus, returns ought to be low.
How wrong, we are.
Just read this : (embedded link, click to read, relevant information)
J P Morgan have invoked the rare tool available with Fund House. They have gated the redemption. Why? Because, due to Default by Amtek Auto Industry, huge fund is locked, and if there is run on Scheme, they may not be able to liquidate all investment at once and have cascading effect on all the schemes. Its like domino effect. Thats what happens, when there is run of money on Large Bank, like in the event of some bad news, all of sudden every one rush to withdrawn the deposit. When Bank puts ceiling on withdrawal or Government or RBI imposes restrictions, its called Capital Controls. We do not believe the possibilities of such event, but just like Black Swan events, these situation does arise.
The investment is all about diversification. Wrong.
The investment is all about diversification of Risk.
This is fundamental mistake every one makes. The equity has 300% more risk than Bank FD. Intuitively, we associate Debt/Income/Liquid funds with Bank FD and does not provide additional risk premium. We are Wrong. The risk associated with Debt Fund is lower than equity but certainly much higher than Bank FD. Again, i am not advocating, equity over debt fund, all I am saying is, understand the underline risk.
So next time, do not believe that Debt/Income Fund are risk free and redemption is only a day away.