Should You Switch From Equity to Debt?

Hello friends. I'm Vijay Bhambwani I'm a trader since 1986 in this market. I have seen all the ups and down in the markets and in my videos, I want to try and help my online friends and family in taking better and informed investment and trading decisions so as to arrive at a higher rate of return.

Now all of you who've been watching my videos for a while now and are veteran viewers of my videos know that I am a very keen on asset allocation, spreading my money across the various asset classes, and I am a big believer in fixed income, especially sovereign debt.

Now many of you in communication with me in comments in emails etcetera, have asked me, Vijay, you've been saying it is prudent to avoid riding the market on a down move and pull your money out well in time before the market comes down and shift to debt or fixed income. That not only avoids you of a notional mark to market loss in your portfolio, but it also gives you some alpha or pure returns by way of interest.

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Now that fixed income is getting more and more lucrative with interest rates going up, many of you are asking me, is it time to get out of equities and go all in into bonds or other fixed income instruments? Therefore, this video is likely to address this question.

Friends, first of all, I do not advocate absolutes. What it means is you should not go 100% out of equity or go 100% into debt. There is no such thing as 100% skew, which means your money should be allocated to various asset classes. You should be spreading your money across counters so as to avoid seasonality and excessive shocks to your capital.

That said, should you be going into fixed income? Hey, if you haven't gone in to fixed income, you're really, really missing something. It's a terrible mistake not to have fixed income securities in your portfolio.

Where I come from, people of my community believe that you should be a venturing into Hazardous and high risk business ventures only after you ensured that you've stashed away sufficient amount of money in fixed income instruments that will take care of home and hearth, which is survival expense.

So if your household expenses hypothetically for example, Rs 1 lakh a month, unless you're getting fixed income return of Rs 1 lakh a month, you should not be venturing into high risk trading of stocks, commodities or currencies.

That said should you actually go all out and raise allocation at one shot into fixed income instruments? The answer is no. Allow me to explain.

Recent articles in the media, and evidence are tells us that rate hikes in India are some of the sharpest in Asia, which means that we are basically leading the way with rate hikes. Why are we doing this? Because of cash carry trade. If an economy A is offering 4% yield and if economy B is offering 6% yield, money flies out of the 4% interest bearing economy and goes into 6% interest bearing economy, all other factors remaining constant.

This is a hypothetical and very simplistic example. There are, of course, various things at play here. But since interest rates are rising elsewhere, India wants to attract foreign inflows. It is leading the way in raising interest rates.

So if you were to block all your money now, at one shot, chances are you will miss out on any further future rate hikes.

Therefore, it is always prudent to stagger or delay or invest in piecemeal in fixed income instruments at this point in time. That way, you will keep laddering your investments at progressively higher and higher interest rates, and the average rate of return will be far higher than what you would get if you were to commit all your money at one go in one shot.

In any case, we are expecting the rupee to depreciate marginally from here and if at all, the rupee is to go down, it will impact the convexity or the sensitivity of the benchmark bond yield to the inflation and to the change in interest rates.

One of the factors which is inflation and currency based inflation, i.e. imported inflation plays a very big role in bond yields. As we are expecting the rupee to depreciate a bit more, it would be better to start to take a piecemeal approach to the bond market.

So to answer your question, should you go all in into fixed income instruments at the expense of equities where you take your money out and invest it all in fixed income, the answer is no. Please do not do that. The world is not coming to an end. This is the down cycle in the equity market. But the bluechips solid companies will make it through and you should basically try and capitalise on the rising interest rates cycle by staggering your investments in fixed income instruments in laddering manner.

I hope this video answers your question and I am looking forward to your feedback to tell me what else you want me to record for you. Which is why good, bad or ugly, I always welcome your feedback in the comments section.

On this cheerful note, I bid goodbye to you not before reminding you to play like in this video, if you liked what you saw. Subscribe to my YouTube channel if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here and help me reach out to fellow like-minded, smart investors like yourself by sharing my video with your family and friends.

Thank you for your patience in sticking around with me in this video. Till we meet again in my next, this is Vijay Bhambwani signing off for now. I wish you have a very, very profitable day

Take care. Bye.