This is not the first time the Thai capital market has fallen into the doldrums. Stock traders are confused about what to do with their investments amid conflicting signals, with some brokerages suggesting investors hold on to their money while others are encouraging them to pick up stocks that are undervalued but with good fundamentals. There is a fear that either move could aggravate their situation.
The fate of those who put their faith in fixed-income investments is no different. The Bank of Thailand's (BOT) unpredictable moves have left everyone guessing as to the direction in which the interest rate is headed.
It of course important for stock investors not to buy or settle their positions at the wrong time. This is also the case in the bond market.
What would happen if you lock your money in a three-month fixed-income fund now?
If the BOT policy rate continues to decline as many research houses expect, holding unit trusts in a three-month fixed-income fund would mean the holder loses the opportunity to gain a higher return.
For example, today's yield of a three-month bond is 4.89 per cent, while the one-year bond yields 5.08 per cent. If one month later, the BOT cuts the policy interest rate by 25 basis points from 5 per cent to 4.75 per cent, what would change is the bond yield.
In a scenario where one is unsure of the interest rate trend, it would make more sense to invest in a short-term bond as it gives the chance to explore other options on maturity, whereas a long-term investment may lock up the funds.
If the policy rate remains unchanged, buying the three-month fixed-income fund would not hurt your returns at all.
So what are the options if we are not sure which way the wind is going to blow?
Money-market funds provide an alternative. This is an almost risk-free investment as fund managers invest in short-term government bonds, treasury bills and BOT bonds. However, there are some funds that add highly rated corporate bonds or bonds issued by financial institutions to their portfolio.
In the present circumstances, the features of such a fund fit the needs of a wide variety of investors, including stock traders, fixed-income fund unit-holders and bank deposit savers.
The funds are attractive because of their convenience, as they can be bought or redeemed every day. Unit-trust holders get or pay their money one day after transaction (T+1), while the funds offer 4-per-cent returns, compared to the average 75-satang interest for every Bt100 lodged in a bank savings account.
Even securities traders can use them as a parking space while the stock market remains volatile.
Fixed-income fund investors, who in the past few years opted for short-term debt tool funds, would have an option to park their money and get returns close to what the former offers. They can wait and see the direction of interest rates before making a decision.
More importantly, such fund products are on the shelves of almost every asset-management firm.
At the moment, the money market looks promising, with asset size having grown significantly from Bt4.49 billion in 2005 to Bt17.24 billion lately.
However, as always, investors should understand the details of what a fund is investing in.
There was a case more than three years ago when a rumour leaked out that one of the issuers had defaulted on debentures. Investors back then, who did not understand much about the investment, flocked to redeem their units - worth almost Bt 4 billion - from the asset-management firm in a couple of days.
Early in 2005, Picnic Corp defaulted on its bills of exchange and five asset-management companies were involved. Some have fully received repayment, but the others have not.
The regulators, including the Securities and Exchange Commission and the Thai Bond Market Association, have been tightening regulations to protect investors. Even though the lessons seem to have been learned by fund managers, investors cannot consider themselves safe all the time unless they equip themselves to protect their interests.