Have you ever thought about how you can leverage debt instruments to meet your short-term financial goals? The biggest advantage with investment in bonds is that they can be easily converted into cash, so liquidity can never be an issue.
When dealing with short-term goals, it’s crucial to consider that the goal’s time frame is brief. Therefore, one cannot afford to be lax with the amount invested or take excessive risks.
Vishal Goenka, Co-Founder of IndiaBonds.com, said, “Selecting the appropriate asset class becomes paramount. Opting for equity, especially in a volatile market with capital risks, may not be prudent for short-term goals. In such instances, bonds emerge as the sensible choice.”
One of the primary advantages is the typically higher interest income compared to a regular savings account, he emphasized. “Additionally, the ability to selectively choose bonds with near-future maturity aligns with short-term goals. Furthermore, in the event of emergencies, selling bonds does not incur penalties, unlike FDs.”
Goenka explains how bonds can help retail investors attain their short-term financial goals, along with examples:
Regular Interest Income:
Bonds pay regular interest in the form of coupon payments to their holders, providing a predictable income stream. Retail investors can use this interest income to meet their short-term financial needs, such as paying bills, funding a vacation, or covering unexpected expenses.
Preservation of Capital:
Bonds are generally considered safer than stocks, especially government securities or AAA-rated bonds from stable corporations. They offer the assurance that the invested capital will be returned at maturity, making them ideal for investors who want to preserve their capital while earning some return.
Liquidity and Easy Access to Funds:
Bonds can be more liquid than certain other investments, allowing investors to sell them on secondary markets before maturity. This liquidity provides retail investors with the flexibility to access funds quickly, helping them respond to immediate financial needs.
Speaking about bond performance in the last 5 years, he said government bond markets have rallied more than 150 bps with 10-year bonds touching a low of 5.75%. Post pandemic, due to massive infusion of liquidity and support globally, bond yields moved higher hampering returns. Then came the inflation genie, which ensured that central banks globally hiked rates, resulting in rapidly increasing short-term rates.
“India, however, has been fairly insulated from the extreme moves and our bond market has demonstrated much lower volatility as compared with the US markets. Which means that returns have been good at steady high rates since last year and now with potential of capital appreciation in future,” he said.
The returns are subject to the exact investment category but given the low corporate rate default cycle, investors have been rewarded for bond investments.
As mentioned above, the fixed-income asset class has grown (and matured) a lot in India in conjunction with the growth in our overall GDP and equity market cap. Since March 2019, bond markets have grown by 74% to currently stand at roughly US$2.53 trillion as of December 2023 as per SEBI and CCIL data.