Thread by @passivefool

It's scary how many times I've received this query. Gilt funds are not for parking your money just because they don't have credit risk, doesn't mean they don't have other risks

Can you use Gilt funds for the short-term? Yes! Apart from you losing money, there's no other risk 1/n

https://twitter.com/iRadhikaGupta/status/1259368638773002242

Some random musing on debt funds now that investors seem to be fixated on them. I think inherently, debt funds are a little intimidating and unintuitive for people to understand. Plus the 16 categories aren't helping anyone. 2/n

Once in a while investors need a rude awakening, otherwise, they keep taking things for granted. Since the IL&FS crisis broke out in 2018, this has been rudest of awakenings for debt funds. What 2008 was to equities, this has been for debt. Finally, people have realized 3/n

that debt funds do have risks and maybe, just maybe, they might not be better than FDs. I think this whole Franklin episode has put the fear of God in all investors with debt in their portfolios and rightfully so. If your pants aren't wet, then you aren't investing right. 4/n

Unless you're a cowboy YOLO investor, I think debt is essential in your portfolio. Debt is that part of your portfolio that allows you to sleep at night while equity keeps you awake. If you are in 100% equities, then always keep sleeping pills and local hooch by the bedside. 5/n

But for various reasons, I see that investors struggle every day, notwithstanding the crisis of confidence in the last couple of years. I know I struggle too.

PS: If I'm not going to say, investing is easy, picking a debt is easy or can be easy. 6/n

If I hear one more guy say Investing is simple, but not easy, I'm going to roll a couple of used batteries and sock him in the face. Every single thing about investing is hard and complicated, and intimidating and rightfully so. That's why you get paid. 7/n

But you can do a few things to make your life a little less complicated. So, to address the question I've been asked the most since Franklin. Are debt funds safe? I hope they are and my money is in the same funds too. But given how fast things are 8/n

evolving with COVID-19, you never know. Does that mean you take your money and stash it an FD or savings a/c or worse yet, your mattress? Personally, I don't think so. I don't think all debt funds are going to go belly up. So, calm down. Stick to quality funds. 9/n

Next, can I use Gilt funds as a replacement for liquid funds? This question shows the serious lack of financial literacy among investors. I think everybody is to blame. If you read the thread above, you'll see that, even though Gilt funds own only Govt bonds and don't carry 10/n

default risk (yet), doesn't mean they don't have other risks. They carry interest rate risk, given that they have a higher duration & they are extremely volatile. Here's 1year rolling returns of some gilt funds. There have been long periods of negative returns. 11/n

I think pretty much all retail investors can give Gilt funds a hard pass unless they know what they are doing and makes sense only for extremely long term goals, even then I am not sure about them.

Next, don't bloody invest because the past 1-year returns are good. 12/n

The reason why they are good is that when interest rates fall, bond prices rise and that means the returns are good. And since 2019, we've had an insane amount of rate cuts. This party can't go! Meaning, that when rates rise, if they rise, and if you're invested in gilts, 13/n

you are sensually buggered! We savvy? No Gilts for the short term!! Next, IGNORE those🤬🤬STAR RATINGS! Especially for debt, IGNORE them. The only way debt funds can generate high returns is by taking higher risks. And when they take higher risks

https://twitter.com/passivefool/status/1218539101298708481?s=20

14/n

your open-ended fund becomes a close-ended fund and your money is locked just when you need it. Worse yet, you end up losing a couple of years' worth of returns as has happened in a lot of instances.
nakedbeta.com/musings-rants/… 15/n

Next, NO BLOODY CREDIT RISK FUNDS! They are an utterly useless category and nobody should invest in these garbage funds. Hands down, it's the worst category of mutual funds in this and a neighboring couple of galaxies, let alone planet earth. 16/n

This is the only category where funds take higher risks to give lower returns. It's almost as if the AMCs know they'll lose money and yet they launch these funds. In the past couple of years, the worst-performing funds have been credit risk funds. 17/n

Just because they have the word "risk in them doesn't mean they can generate higher returns! They are utterly, totally, completely, useless. A lot of people have made a lot of arguments that these funds will perform better when the economy recovers, when spreads are elevated 18/n

and a 100 other seemingly smart-sounding reasons. But I can assure you, nay guarantee you, that they won't be able to beat a corporate bond fund by more than 0.5-1%. And for those meager return taking an enormous amount of additional default risk is Oscar's level stupidity! 19/n

Next, don't pick debt funds based on high YTMs, please. That's like always driving at 100 not expecting an accident. Funds can have high YTMs for a variety of reasons, they are taking deliberate risks, they are facing severe redemptions and they've sold off the easy to sell 20/n

bond first and are left with crappy bonds, which always have high YTMs. That means the fund will have a high YTM even though, it's poor. So, can we not do this silly thing? 21/n

I have a simple backtested equation for you guys. I've spent more than 5 years coming up with this formula.

In debt higher returns almost always = higher risk which is always = to higher defaults which always = you losing you bloody money! 22/n

Next, even though there are 16 categories, except for overnight, liquid, ultra-short, money market, corporate bonds, banking & PSU categories, I think all the other categories are pretty much useless for most retail investors. 23/n

Before I get into categories, most Indian investors already are overexposed to debt. If you are investing in EPF, PPF, VPF, traditional insurance policies (whyyyy???), most ULIPs, they are debt. So, you may not even need debt to begin with in the first place. 24/n

Next, fixed deposits. Due to all these silly comparisons with deft funds, FDs have been unnecessarily and needlessly been vilified. FDs are awesome and will remain awesome. In fact, there's no compulsion to choose debt funds over FDs, they more than get the job done. 25/n

As for categories, skip all the fuzzy categories with ill-defined definitions like low duration, short duration, low-mid, mid-long etc. You probably don't need them. This post by @kendheswapnil is quite handy, do read. 26/n freefincal.com/debt-mutual-fu…

Here's another @FreeFinCal post on the same topic, should help you avoid all the needless categories
freefincal.com/how-to-select-…

27/n

Thumb rules are just thumb rules. Just because a fund has only AAA-rated bonds doesn't mean it's risk-free -IL&FS, DHFL, etc were AAA before things went to hell.

High AUM doesn't always mean safety. Franklin funds were some of the biggest in their categories. 28/n

You'll have to look more closely. This post by @primeinvestorin shows you doing surface-level analysis can be harmful
primeinvestor.in/evaluating-deb…

And you know what, learning the basics pays. I think, it might seem like all this debt jargon is intimidating but I think with enough time, you can figure things for yourself and have a solid framework for the debt slice of your portfolio. 30/n

This @FreeFinCal post is awesome
freefincal.com/debt-mutual-fu… 31/n

And it's also extremely important have a framework to think about debt and these two posts by @arrychary are posts that I've probably shared the most
1
valueresearchonline.com/stories/46714/…

32/n

2.
Do read them and they're quite awesome. They've helped my thinking about debt funds.
valueresearchonline.com/stories/47010/…

And finally, don't do dumb things in times of crisis. Carefully review your portfolio and act only needed. Get risk of all credit risk funds, they are unnecessary. If you are thinking of going to Gilt funds, ask your self the question, do you understand them? 34/n

Can you handle this volatility? This is a chart of the yields on the 10-year bond. That is how Gilts move. Can you handle that 35/n

Also, stay away for fancy funds like Dynamic Bond funds. Timing interest rates is EXTREMELY HARD. Keep things as uncomplicate din your debt slice of the portfolio. All this fancy bullshit and attendant headaches and heartaches are worth it. 36/n

I think it's the end. But if I think of anything I'll add to the thread.

Don't treat this as investment advice, PLEASEEEE 🙏I also BEG you not to take random investment advice on Twitter including this very thread. Learn, invest, make mistakes, learn, and repeat. 37/n

If you aren't sure of these things, hire an advisor, and live happily. 38/38

The end

I'm getting drunk and reading The Intelligent Investor now.