Some are true and some are myths.

1. Fixed interest rate government bonds are risk free.

2. Interest Rates are set by the Reserve Bank of India.

3. Central Bank Governors do not like Gold because they cannot manufacture it.

4. Gold is a bad investment because it has few productive uses in industry.

5.Tax free government bonds are a good INVESTMENT for a young investor paying high taxes.

6. Bonds are a good investment and should represent a very big portion for an investor.

7. Bonds and bank fixed deposits are better than bond funds – there is no maturity risk.

8. The share market’s 3 decade appreciation and super growth is because of growth, innovation, exports, market penetration, and good management.

….many more…but want your responses please….

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  1. 1. Interest rate risk is there. Unlikely govt will default (although some countries have in the past).
    2. Sort of. Sometimes the market might force their hand to yank rates up/down due to forex flows.
    3. Yes.
    4. No. Gold has been the only store of value for centuries. All experiments with paper money have led to currency debasement.
    5. No. Tax Free bonds give tax free income, the money you invest is not deductible from taxable income.
    6. Depends on risk appetite/goals etc.
    7. No.
    8. Partly true but a lot of money printing at work too which has supported prices of all assets.

  2. I think 4 is somewhat true. Gold is a bad investment because it has no practical utility. A kg of gold will still be a kg of gold 100 years later. Same can’t be said about a company share or land. 500 years back it was relevant because wars, floods etc were common, there was no currency and people needed something small and valuable to run away with. In today’s world, I am not sure if it would help even in such extreme scenarios.

  3. Hi Subra, these are my views on your points.
    1.Russian as well as Brazilian governments went broke. Even government bonds have risks though negligible.
    2. RBI sets repo and reverse repo rates as well as SLI, thus they have a large influence on interest rates.
    3. Gold imports cause current account deficit and hence not liked by central bankers. Also like you said gold cannot be created out of thin air.
    4. Gold is a protection against hyperinflation as all our currency is fiat, not backed up by any physical assets
    5. Young investors should put a large portion of their savings in equities, as over long term equities give highest return than any other asset class. And long term equity is tax free. Tax free bonds are more suitable for people nearing retirement or retired folks.
    6. Bonds are for risk averse individuals, they should form a set proportion of your asset mix based on risk appetite.
    7. Bond funds are more flexible and reduce risk, as fund houses invest in different bond types. Thus bond funds are vastly superior to direct bond investment.
    8. Yes, capitalism favours innovation and disruptive practices. Stock markets are fueled by the factors you mentioned, but many a times fear and greed take over which signals buy or sell opportunities.

  4. 1. Fixed interest rate government bonds are risk free. Other than inflation risk, yes.
    2. Interest Rates are set by the Reserve Bank of India. Not directly. Indirecty, yes.
    3. Central Bank Governors do not like Gold because they cannot manufacture it. No idea.
    4. Gold is a bad investment because it has few productive uses in industry. No. Illiquid. LT has not grown as much as other assets.
    5.Tax free government bonds are a good INVESTMENT for a young investor paying high taxes. No. But if you are equity-heavy and in a non pensionable job close to self employment, some exposure may help.
    6. Bonds are a good investment and should represent a very big portion for an investor.No.
    7. Bonds and bank fixed deposits are better than bond funds – there is no maturity risk. Taxability and inflation risks are negatives for FDs. Bond funds have risk—horrible growth in last few years.
    8. The share market’s 3 decade appreciation and super growth is because of growth, innovation, exports, market penetration, and good management. Luck. FII flows. Demand/supply of good co stock. (imho)

  5. 1. Nothing is risk free. You may not get repaid on time.
    2. No . Individual Banks set interest rates.
    3. They love it just see the amount of gold held by the US treasury.
    4. Yes. but can be used as a hedge when other markets are not doing
    well.
    5. No. younger people are better off in Equity Mutual Funds and will get
    superior tax free returns over a period of time as Long term capital
    gains are tax free.
    6. No. again same reason as above.
    7. Bond funds are better as you can exit when you want.
    8. Share markets have grown because India is still a developing country
    and will continue to grow as we have a young age demographic.

  6. 1) No. But relatively low risk than other kinds of bonds/FDs.
    2) RBI can only control base rates , but individual banks sets the interest rates. Recently RBI spanked banks for not reducing the IRR for borrowers, it’s like RBI having indirect control over interest rates.
    3) I dont know .. Last time when Mr. Pranab Mukherjee was FM , he pushed RBI to buy 200 Tons of Gold as reserve. Aftermath, same Govt banned importing Gold. God knows what’s in their minds.
    4) My Mom says Gold is only asset that can be bought little by little by poor which can save them on an catastrophe event.
    5) Definitely not. Young investors need to put all their savings in Equity.
    6) Until your are in 50s or 60s , Bonds are not really recommended. 7) No idea.
    8) NOPE. It’s because you were lucky. I would consider stock market index appreciation for calculation only after post economic liberation. Please post you opinion on this … I cannot imagine how could HUL/ITC can list their shares at their face value ??!

  7. 1. No. Recently we saw Greece, Iceland, Itley etc. bonds loosing faces due to country on the brink of Bankruptcy.
    2. Interest Rates are set by the Banks. RBI governs the factor which may or may not have impact on interest rates of a bank. For example, recently RBI reduced reverse repo rate thinking banks will reduce loan interest, but that didn’ happen. After around more than 1 year passed, now banks are reducing loan interest rates by around 15 to 25 basis bpoint.
    3. No, it’s not like that. At times, they also wants to buy gold to provide monitory stability. But RBI cannot directly buy or sell GOLD.
    4. In the event of financial meltdown like 2008, gold was the only hedge to save face.
    5. Not completely true. It depends on the goal and the risk appetite. These are TEE (Taxed Exempted Exempted).
    6. Not completely true. It depends on the goal and the risk appetite.
    7. Partly true. Risk is there with Fixed Deposit also. Capital up to 100000 is guaranteed by government in case of failure of PSU bank.
    8. It’s a myth.

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