I had done a post long ago about Debt funds vs Bank fixed deposits, with the conclusion that your Debt funds are an amazingly good thing to have. Obviously this is from the tax point of view.
Many people asked me ‘does it mean we should not have any bonds in our portfolio’. Fair enough a question.
That was not my intention. Taxation is not the only thing to consider, BUT UNDENIABLY IT IS THE MAIN thing to consider in case of debt funds and bank fixed deposits.
Let us look at Bonds (and not bond funds) – and their advantages:
1. At current interest rates in India, appreciation due to falling interest rates is guaranteed – especially over a 3 year period, if not over a one year time frame.
2. Benefits of diversification: you cannot have an equity only portfolio. Also bonds are very liquid (for small amounts like Rs. 20 lakhs), and there is no reason why emergency funds cannot be kept in bonds.
3. Bond prices fluctuate: however they do not crash with the velocity of the stock market. So you can see a 10% kinda correction, but a 30% correction (not talking about a downgrade)..is kinda difficult. So if you stay on in an AAA or AA+ kinda bonds you will not lose money EXCEPT IF YOU sell in panic. Hold to maturity AAA portfolio NEED not be sold in panic. And with such high current yields, you do not have worry about MTM losses. So buy a 25 year bond and hold it to maturity!!
4. When investing in a bond, look at total return not just the current yield. The yield on a hold to maturity basis is far more important…
5. It is the stability part of a portfolio – during bad times this portfolio is easier to sell…and far less emotional…
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