When a new product is launched there is a lot of excitement. It is customary for Indian players to compare it to the size of the international markets and say that there is a huge opportunity. True.

Let us not even dare to compare our equity market to our bond market and gold market. Equity markets – due credit to SEBI – is a robust well developed market. The mutual funds are a very big beneficiary of this fantastic liquid, transparent market. This is not available for bonds or for real estate.

We have been talking of a great debt market which we will create. I am still waiting for the so called bond market to develop. RBI is not allowing the secondary market to develop – and that has caused many scams right from the Harshad scam. With an illiquid secondary bond market will a bond mutual fund develop? No.

In fact the non existence of a good, robust secondary market means that a good debt product cannot be market dependant. Mutual funds by definition have to invest only in marketable securities. However given the fact that we don’t have a good secondary market we create securities which are loans, but made to look like marketable securities.

When the Supreme Court passes an order which will cripple Vodafone and Idea, see how the markets react. The Debt products FREEZE. End of story. IN the equities market somebody is willing to buy, and market price discovery happens. There is no price discovery mechanism in debt markets – which means when a patient has flu we start preparing for the funeral. So many fund houses have exposure to Voda and Idea – and the frustrated bond mutual fund holders will exit. Every market churn acts as a wealth transfer process – from the uneducated, hyperactive trader to the Vipassana experts who can sit tight during a crisis. All this mess is because there is no price discovery mechanism. If it was available we would have a great range of debt mutual funds – the returns depending on the amount of risk one wishes to shoulder.

While investing in a debt fund you MUST realize that there is some risk – unlike say a SBI or Hdfc bank fixed deposit. However, you will appreciate that you get a higher return (especially post tax) if you are in a mutual fund for more than 3 years. Also the short term capital gains (if any) can be set off against short term capital loss (if any). So the effective tax rate can be much lower than a bank fd.

Look for a well diversified portfolio. If a fund has 33 securities of 3% each, the risk is lesser than a fund which has 5 items of 20% each. Sheer laziness of fund manager – let us call it incompetence for the want of a better word.

Check whether the amc has an ability to attract AND RETAIN a good team. Check the stability of the team. If you are investing through an IFA ask him or her to find out.

If you are a debt fund investor (or even equity)…stop getting excited Learn to sit tight through tough times. When a fund loses some aum due to a downgrade, remember that the optical loss can be made up by sitting tight for a long period. Such funds have a higher yield and a big part of the losses will be covered in the period left. So hold on for 3 years and then we will discuss returns. Not on the day that the Supreme Court has passed an order.

For all I care it might just be a great day for investing in debt funds!!