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In Aug 2020, I left my job and joined 3 years full-time post-grad program. So 1.5 years is already over. Leaving my job during COVID days made me concerned. So I felt I should have significant investment in no-lock-in + fixed return + risk-free instrument. Earlier I had investments in debt and equity mutual funds. And in Agu 2020, debt funds had started giving negative returns. So I withdrew from debt funds, but that amount is lying in savings account 😥.

Now I feel I should park it somewhere for the remaining 1.5 years, again in no-lock-in + fixed return + risk-free instrument (Q1. am I correct with this?).

Earlier I never preferred FDs. Q2. But, is 2 years FD with a 7% return good for this scenario?

Q3. What better (than such FD) fixed income instruments I can invest in this scenario?

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  • is that 7% return per year or over the 2 years? (either way its very good since here its about 1% pa)
    – Aequitas
    Dec 1, 2021 at 0:45

1 Answer 1

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So let us walk away from the idea of predicting the future and instead take up the idea of constraints, valuation and risks.

The first question becomes "what purpose does this money has to serve over the next 18 months and beyond?"

If you can say, "I will never touch a penny of this money for the next 18 months no matter what happens," then your answer might be quite a bit different if you said, "I could lose all support for my income in that time frame."

What constraints must that money have on it?

If you said, "I won't use that money in any circumstance for twenty years when I retire," then there is no short-run meaningful constraint on the money.

The next issue is valuation. I hold the view that I will only invest in equities, real estate, and so forth if I have a very high degree of certainty that I will earn at least double the ten-year corporate bond rate if I held the firm until I die. That means I only buy deeply discounted assets. You may have a different personal policy.

You should have a rule that has nothing to do with COVID. COVID may make the rule stricter but never laxer. If you have no rules for bonds and ownership claims, then you are always flying by the seat of your pants. You are making no demands on your money.

COVID changes many risks. Non-debt tends to be counter-cyclical. It is most valuable when nobody needs it and least valuable when everybody needs it. Debt tends to be the reverse.

COVID brings the risk that asset sales will have to happen. There is no certainty that such will be the actual state of affairs.

So, first, look at cash demands over that time. Be certain you can meet them. The interest rate is less important that being sure you are solvent.

Second, if you are considering non-bank debt instruments, be certain that you will be paid. Some debt, like junk bonds, is counter-cyclical. If there is a risk that you will not get money when you need it, then you should own equity-type investments.

In addition to banks, insurers offer a variety of fixed and floating-rate payment offerings. What is important for them is the country that you are in and the contractual terms. As a rule of thumb, insurers pay a higher rate than banks but they will tend to lock up your money longer.

Debt based portfolios, such as mutual funds, only actually earn the current yield minus expenses over the long run. You may be capable of generating higher returns but with diminished liquidity by buying high quality government and corporate debt with maturities that fit your needs. Nonetheless, debt-based portfolios are attractive in that you can usually liquidate them, almost on demand.

There is one exception to that. If the money needs to be in debt but also will not be needed anytime soon, closed-end debt funds selling at a discount can be very attractive when they are available.

For example, a portfolio selling at seventy cents on the dollar on the open market would permit you to buy a $100,000 portfolio for $70,000. The difficulty would be that it may take months for you to exit when you need to get out. When they sell at discounts to their face value, it is because nobody is currently interested in owning them.

Finally, as to risks. COVID brings a couple of unique risks. As mentioned above, it brings the risk of the need for asset liquidations. It also creates the risk of a revolt by a population and a change of government. That would be a catastrophic event. Does COVID pose some type of risk to your asset issuer in addition to any risks that normally exist?

If you are sitting in the desert with a bow and arrow but no target, then it does not matter in what direction you fire the arrow. If you have a target set up, then you should choose your bow and arrows based on your target and skills.

Don't chase yields. Grab opportunities built on goals that cover your constraints and that are priced so that your results are not due to random chance.

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