Investing In Cash, Bonds For Long-Term Highly Risky, Says Morningstar’s Dan Kemp

Dan Kemp, chief investment officer (Europe, Middle East, and Africa region) for Morningstar’s Investment Management Group. (Source: BQ Prime)

While holding cash and government bonds looks attractive in the short-term, they are the most risky assets over a longer period, according to Morningstar's Dan Kemp.

Many investors are holding cash and government bonds over equities to beat the current downturn, which is unlikely to generate good after-inflation returns in the long run, Kemp, chief investment officer (Europe, Middle East, and Africa region) for Morningstar's Investment Management Group, told BQ Prime's Alexander Mathew.

“For the first time in a long period, investors can get decent above-inflation returns while holding cash or government bonds, and that's where we are seeing more interest.” Over the long-term, once accounted for tax and interest rate volatility, you are unlikely to make good after-inflation returns in cash and bonds, Kemp said.

Holding cash and bonds is only a good strategy when investors will buy back equities in the future, Kemp said. “But, sadly many people aren't able to do that.”

Advice For Investors

It's a tough time to be an investor, and it is particularly so "because we are surrounded by so much noise and news flows", Kemp said. “The biggest danger for investors is that they try to make investment decisions based on these events.”

People should make investment decisions independent of news outcomes, but should think about how the outcome could impact their portfolio in different ways, he said.

According to Kemp, the key to a good portfolio is to not focus on the economic forecast as the foundation for long-term investments, as such forecasts are usually for the short-term.

The biggest impact of the Israel-Hamas war is the psychological risks that creates a desire to make bad investment decisions in times of crisis, he said.

The increasing inflows by domestic players through mutual funds and other platforms in the equity market mark a significant change where people are now saving using capital markets, Kemp said. “This savings culture not only brings more stability but also brings opportunity for wealth generation.”

According to data released by the Association of Mutual Funds in India, the contribution of the systematic investment plans to the mutual fund industry crossed the Rs 16,000-crore mark for the first time in September.