While investments in volatile debt instruments like equity work based on various macroeconomic factors unpredictable to layman investors, experts say fixed-income investments offer a predictable return.
Financial markets are fluctuation-prone at all times, and interest rates remain unpredictable.
Be it investing in mutual funds or saving in any other financial instrument, savings and investments in India have increased a lot, especially since the pandemic. Having said that, experts point out that most people just select an instrument and put their money into it without strategizing.
Ajinkya Kulkarni, Co-founder of Wint Wealth, says, “Investors must strategize how they allocate and rebalance their financial portfolio from time to time. In addition, investors can also rebalance their investment portfolio using fixed-income assets as a risk management tool.”
1. Fixed income investments depend on one’s age
The lower the age, the higher is the risk appetite of an investor. Young and adventurous investors are often attracted to volatility-prone investments that promise high yields but no fixed returns.
Kulkarni says, “As investors age and move closer to retirement, it’s crucial to preserve capital and alternate income avenues. Fixed income yielding investments are attractive for people in their 50s and 60s who plan to retire in 5-10 years and sustain their lifestyle with fixed returns.”
2. Settle for fixed income securities when the stock markets rise
Asset rebalancing, in particular between stocks and fixed income securities, is the best way to be immune against market shocks.
Kulkarni says, “Many financial advisors could suggest rebalancing an investment portfolio and moving the investments to fixed-income products when stocks are nearing their peak. While theoretically, it may seem unsettling to sell off a ‘winner’ to buy a comparatively low-yielding asset, it’s best not to fall for such biases.”
He further adds, “Fixed-income assets balance volatile allocations by ascertaining elements like safety, income, and stability in the investment portfolio.”
3. Choose fixed income debt instrument when markets offer low-interest yields
Industry experts say, low-interest rates glorify comparatively high-yielding bonds in the eyes of the investor, and rightly so.
“Since bond prices reflect multiple factors like growth projections, inflation, and monetary policies, interest rates etc., avoid investing in debt in a rising interest rate environment if the debt is open to interest rate risk. Rising rates mean lower bond prices which means your debt portfolio can drop in value. In such a case, go for investments that aren’t affected by interest rates like low duration bonds, liquid funds or FDs,” says Kulkarni.
The bottom line
While most people like to believe that returns from fluctuating income investments are more than fixed-income investments, Kulkarni says, “they overlook that the difference between them is meagre. Fixed-income investing is evolving.”
However, at the same time, there are risks involved in all kinds of investments – fixed income investing tones it down. Thus, there is no one perfectly balanced financial portfolio as the level of perfection changes through financial markets.
Experts say thoughtful asset allocation and timely asset rebalancing are the keys to sustaining the rapidly oscillating financial terrains.
Kulkarni says, “If you are a later-stage investor, your time to move to fixed-income products is now. A fixed-income favouring asset allocation strategy can support broader portfolio objectives.”
Today, fixed deposits, debt mutual funds and bonds are the leading fixed income investment avenues. In the current market, fixed deposits offer low interest rates.
Bonds, in general, are high-yielding fixed-income options fit for people with a higher risk appetite. Kulkarni says, “An exception to this is the relatively new covered bond, a debt instrument secured with a dual security layer that needs to be understood depending on one’s risk appetite to consider it in their portfolio.”