Thread by @b50

Liquidity, return of capital, return on capital are the three basic things that drive any investment decision. Hear me out.

Liquidity is access to your money when you want it 24x7. Examples: an FD is extremely liquid, a liquid fund takes one day, PPF is locked in, an investment in your friend's startup is locked in.

We underestimate liquidity; liquidity is critical to price discovery. Reliance's price is more reliable and therefore less prone to manipulation than, say, a smallcap stock with low float.

Liquidity is also important for us because we have a whole host of small (and big) saving investment avenues like RBI floating rate bonds, NSC, KVP, PPF, etc.

Liquidity matters most when there's a crowd rushing out of the door. You don't want to be in a tiny room with just one exit. You want to be in an auditorium with many exits.

Return of capital. In a world where there are no guarantees, a guaranteed return of capital is awesome. Sovereign guarantee (eg: RBI Floating rate bond), bank guarantee (FDs, SB accounts, etc) are some examples.

Important: Guarantee means guarantee of a large, credible, institution (like the Govt or a bank), not guarantee of your financial advisor or a Twitter user.

Stocks, mutual funds (even debt MFs) do not carry any implicit or explicit guaranteed rate of returns. Some insurance polices do but they can't be compared to, say, sovereign guarantee.

Real estate and gold also have no guarantee of return of capital. Real estate prices can halve, gold prices can fall - both have happened in the past.

And finally, return on capital (ROC). I think this is the easiest to understand. What's not easy to understand is YOUR expectation of ROC. It's usually anchored to something.

Eg: Stocks should beat inflation (anchor). Sensex return since inception is some 15% Cagr which easily beats inflation. But that's the past. Who knows about the future.

Or anchoring to the amount you invest. An HNI who invests Rs50L in a PMS expects to beat, say, a Rs500 SIP into an index fund. I'm not quite sure that logic holds.

ROC anchored to past returns is the most popular form of setting an estimate to the future. Doesn't always work. Eg: RIL stock price languished for a long time before melting up. "Past performance is no indicator of future performance".

Repeat: liquidity, return of capital, return on capital. All three are really important determinants of any investment. Of course, there's also taxation and other stuff too. Do consult your financial advisor. Fin.