By Varun Fatehpuria
In an era of peaking interest rates, one of the most compelling reasons to favour bonds is their inherent stability. Unlike debt mutual funds, which are often influenced by market conditions, bonds provide a fixed return on investment. This stability is particularly valuable when the financial markets are experiencing turbulence.
Predictable returns
Debt mutual funds come with a certain degree of unpredictability. They are influenced by market forces, and returns can fluctuate based on factors like interest rate movements. Bonds, on the other hand, offer a known coupon rate and maturity date, ensuring that investors can anticipate their returns accurately. This predictability is a critical advantage, especially for retirees who rely on consistent income from their investments.
Tax efficiency
Bonds, especially tax-free government securities from issuers such as NHAI, IRFC, REC, etc., provide a tax-efficient investment option. The interest earned on these bonds is exempt from taxes. This can lead to higher after-tax returns compared to debt MFs.
Diversification
Bonds provide an effective means of achieving diversification while keeping things simple. By investing in a mix of government, corporate, and state development loans, investors can spread their risk across different sectors and issuers. This diversification minimises the impact of a default by any single entity, enhancing the overall stability of the investment portfolio.
Reduced cost
Investing in bonds offers cost advantages over managed investment vehicles like debt mutual funds/PMS/AIFs as there are no management/performance fees, or load charges.
Tailored to your needs
Bonds offer a level of customisation that debt mutual funds cannot match. Investors can select bonds based on their risk tolerance, investment horizon, and financial goals. Whether one seeks long-term growth, regular income, or a combination of both, there are bonds available to suit every investor’s unique needs.
Hedge against inflation
In an environment of rising interest rates, inflation becomes a concern for investors. Bonds, particularly floating interest-rate bonds, can serve as a hedge against inflation. As interest rates rise, the yield on existing bonds may also increase, providing a cushion against the erosive effects of inflation on purchasing power.
While a fund structure has its merits like professional fund management, bonds stand out as a steadfast investment option in times of peaking interest rates. Their stability, predictability, simplicity, and customisation make them a compelling choice for investors looking to weather the storm of economic uncertainty. By incorporating bonds into a diversified portfolio, investors can enhance their resilience against market volatility while optimising their returns.
The writer is founder of Daulat. Views expressed are personal.