scorecardresearchFinancial experts explain why this may be the best time to invest in bonds

Financial experts explain why this may be the best time to invest in bonds

Updated: 19 Jan 2023, 04:09 PM IST
TL;DR.

You can never undermine the importance of bonds in an investment portfolio. Just when investors had signed them off owing to greater earnings from equities, higher interest rates on offer coupled with the fear of an imminent recession is pushing many people to turn back to bonds for enhanced security.

Why invest in bonds right now?

Why invest in bonds right now?

The prospects of earning more from equities are higher though there has been a temporary lull in the recent past. Irrespective of the Covid-19 effect and the impact of sudden geopolitical tensions, the Indian stock market has outperformed the global peers last year. However, considering the recurring volatility and the fear of possible recession, it would help to focus on building a fixed-income portfolio consisting of bonds, government securities (G-Secs) and fixed deposits. Reduced volatility and consistency of income coupled with the predictability of returns have prompted many people to shift their investments from equities to bonds or those containing a higher debt component.

The sharp rise in interest rates to control inflation has had a tremendous impact on the bond market. As a result, nominal yields have skyrocketed, causing bond prices to plummet. This allows today's investors to invest in bearish markets in order to lock in higher yields.

We asked two financial experts if this is the right time to invest in bonds.

Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners, said, “Investing in bonds with the right tenure, safety and coupon is indeed a good option. This is so as we are somewhat near the top of the interest rate cycle and investing now and holding to maturity may be a good investment choice.”

Viral Bhatt, Founder, Money Mantra, opined, “When interest rates rise, bond prices go down in value. Most bonds pay a fixed coupon (i.e. interest payment) and if rates go up, the only way a fixed coupon can equate to a higher interest rate is if the investor pays less for the bond. A bond's duration is the measure of its price sensitivity in relation to a change in interest rates. Duration is a function of maturity, so the longer the maturity of a bond is, the longer its duration will be. The price of a longer-maturity bond is therefore more sensitive to a change in rates than that of a shorter-maturity bond, assuming all other things are equal. If rates are going up and bond prices are going down, why would I want you to think about bonds? Go for a shorter duration, ultra-short or short or medium-term bonds.”

Many investors are shifting to debt mutual funds that park a greater part of the money in bonds. Though these fund houses charge expense ratios too, investing in bonds through them is considerably easier.

Article
Here we explain the role of bonds in a portfolio.
First Published: 19 Jan 2023, 04:09 PM IST