A well-diversified investment portfolio should be balanced with equities and fixed income instruments. Corporate fixed deposits and bonds are fixed-income securities that help to bring balance to your portfolio. It enables you to ride out volatility with growth along the way.
You can find several types of bonds in the market – each comes with different time-frames, returns, benefits, risks, and taxes to an investor’s portfolio. Let us take a closer look at how to select the right bonds based on your financial goals considering market fluctuations, how to strategize bond investing, how to find the right fixed income investments online etc.
Capital Protection and Interest-Earning
If you aim to preserve the capital and earn interest, you can go with the buy and hold strategy. Holding bonds till they mature provides you with Annual, semi-annual, quarterly, monthly… interest payments and the bond’s face value at maturity. When you hold bonds till maturity, your focus should be on the impact of interest rates on a bond’s market value. With an increase in interest rates, if the market value of your bond decreases, your strategy should not be changed.
When bond investing is strategized with buy and hold, an investor needs to consider:
- The coupon of the bond
- The yield-to-maturity. Higher yields can bring higher credit quality risks.
Maximizing Income
If you are intended to maximize your interest income, longer-term corporate bonds can help you. Corporate bonds provide higher coupons than government bonds at equivalent maturities. Secondly, bonds with lower credit ratings generally offer higher returns. The lower the credit rating, the higher the default risk. What an investor can do is diversify the bond investments among several bond issuers. Make sure that your risk appetite can bear such a huge risk.
How Bond Duration Affects Your Bond Holding
Bond duration seems simple that is associated with the investment horizon. Investors need to understand that if you buy a bond with a tenor of 30 years, it will fluctuate more than a bond with a tenor of two years. As a bond investor, you should know that bonds with long maturities can actually fluctuate as much as stocks! Select bond duration after considering this fact also.
Bond Laddering to Reduce Interest Rate Risk
Investors can reduce interest rate risk on bonds by spreading out the maturities. This spread of maturity dates is called bond laddering.
For instance, if you invest Rs.50,000 in bonds. Instead of investing the entire amount in a single bond with a 10-year maturity date, you can invest in two or three bonds with staggered maturity dates, utilizing a simple bond ladder strategy.
Bond laddering is helpful as bonds come with long-term maturity, and the market can change hugely during this long tenor.
Saving for a Definite Long-Term Goal
If you have a long-term financial goal like kids’ education abroad, retirement, etc., with bond investing, you can be sure that required funds are there when you need it. Zero-coupon bonds are sold at a discount, and the difference between the price at which you bought them and their face value is paid at the maturity date. An investor should know that the value of these bonds is more sensitive to market interest rates. Therefore, it may not be prudent to sell them before maturity.
Consider Bond Spreads
With a high pace in economic activities, corporations preferred the bond market to raise funds as banks acted risk-averse in lending. It led to an increased spread between the 10-year government bonds and corporate bonds. There were rapid rate cuts by the RBI during the pandemic. With a 135bps rate cut, the five-year corporate bond yields fall was 175bps. The fall was significant in corporate bonds due to higher liquidity.
Market analysts say spreads can rise in the future as the Central Bank RBI keeps yields low through secondary market bond purchases in order to manage the government borrowing program. The corporate bond market may not have such support.
Combining the two asset classes
Stocks are more volatile as compared to bonds. Often, the stock market and bond market follow opposite roads. When the bond market supports investors, the stock market does not.
It will help in generating stable returns if you combine these two assets in your investment portfolio. Sometimes, when the stock market falls, the bond market can help to balance out the losses.
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A good bond allocation might include both types of bonds – government and corporate to diversify the portfolio at reduced risk. Diversifying a bond portfolio may not be that easy because it can take a significant amount to create a diversified portfolio.
If you are one of many investors struggling to select the right corporate fixed deposits and bonds, and diversify the investment portfolio in a balanced way, RURASH can help you overcome all investing challenges. We can help you get the true value in the secondary market with more transparent pricing than primary issues.
RURASH is amongst the top Investment Management Company in India, providing financial solutions to augment the client’s wealth and facilitate building a legacy. For any guidance regarding financial instruments.
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