InvestorQ : Is it true that when I have assured outflows, then bonds and bonds funds are a better bet and why so?
Dilmini Mercia made post

Is it true that when I have assured outflows, then bonds and bonds funds are a better bet and why so?

Answer
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Dawn Cherian answered.
1 year ago


Assume that you have a target of reaching a corpus in 20 years to pay for your daughter’s foreign education. It is hard to make money on debt over a longer period of time and hence you must look at a bigger allocation to equities. But what happens as you approach the milestone? Ideally, you should keep prudently increasing the exposure to debt funds or liquid funds so that around the milestone your risk of loss on liquidation is almost minimal. Debt funds play a key role in balancing risk and returns closer to milestones. This is very true when you are approaching milestones. You cannot stay in equity and suddenly realize that markets have crashed around the goal. That is not a good situation to be in.

Just as equity is wealth creating, debt is resilient, reliable and flexible. Debt, as an investment option, is extremely dynamic and flexible. Debt has a lot of sub components too. Consider two instances! If you find that the risk of shifting from AAA rated debt to AA rated is not too high, then you can do quality-fishing by shifting to bonds with lower rating profile. Secondly, when interest rates are likely to fall, you can tweak your debt fund portfolio to include more funds with longer maturity so that you can get the best benefit of price appreciation.