Your Money: Spread your risks through bonds; invest in a mix of govt, corporate and state development loans
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.
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.
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.
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.
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.
Bonds offer a level of customisation that debt mutual funds cannot match. Investors can select bonds based on their risk tolerance, investment horizon, and
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