By Raghav Iyengar
With benefits such as capital preservation, income generation, ability to counter-balance the portfolio, and the potential to provide a hedge against inflation risk, fixed income assets have enabled investors to take advantage of the various market cycles. However, it is imperative to dispel some common myths related to this asset class.
Myth 1: Fixed income assets do not offer growth opportunities
Growth investing is a style that focuses on investing in companies that promise expansion and long-term wealth creation opportunities. While the approach has its own set of merits, completely disregarding fixed income assets may not be a wise approach. Within fixed income, you have the option to invest in short-term instruments that not only offer higher liquidity but also easier access to capital.
Myth 2: Bonds won’t add value if rates keep rising
Interest rates and bonds have an inversely proportional relationship. In order to safeguard their investments and expected returns against any unexpected changes, investors can opt to buy bonds at a fixed interest rate. In fact, short-term bond funds have the potential to act as a good entry point for investors who wish to diversify their portfolio with exposure to debt. In a rising rate scenario, the short duration strategy adopted by these funds has the potential to reduce volatility and also offer interest income.
Myth 3: Fixed income is always less liquid than equities
Generally, stocks are considered highly liquid since they can be easily traded on the exchange but that does not make fixed income investments completely illiquid. Investors have access to a wide range of debt instruments that settle on various trenches of the liquidity spectrum.
Myth 4: Age equals fixed income investment
This is probably one of the biggest misconceptions. An investor’s exposure to any asset class is a function of his/her risk appetite, investment corpus, financial objective, and the investment tenure. Age has very little correlation to it.
Myth 5: Higher rewards require higher risks
No investment option comes with any real guarantee of returns. It is always subject to a range of internal and external risks that no advisor or company or government may be able to fully control. It is advisable to assess your risk-taking ability before narrowing on the investment avenues. Furthermore, staying invested in high-quality assets (AA rated or higher) is known to pay reasonable dividends.
The writer is chief business officer, Axis AMC.