InvestorQ : What are the major contributions that bonds make to your portfolio mix?
Dilmini Mercia made post

What are the major contributions that bonds make to your portfolio mix?

Dawn Cherian answered.
2 years ago

Equities are great to create wealth over 25 years but what if you need to plan for the next 4-5 years? That is where bonds or debt instruments come in handy. There are millions of Indians who rely on their investments for regular income. This can either be in the form of interest on bank deposits, FDs, corporate deposits, government bonds, dividends on bond funds etc. In case of equity, there is no obligation on the part of the company to give you regular income. Dividends are only paid if there is profit; not otherwise. Instead, you can structure a debt fund as a growth plan or as a dividend plan but either ways you can be assured of regular income. There are different tax implications based on how you take money out of the fund but what matters is that if you need regular income from your corpus. Irrespective of the structure, debt exposure gives you regular flows that are predictable and hence you can rely upon on them.

There is one more role that debt plays. It helps you to temper the risk that is implicit in your portfolio. Normally, with advancing age and shrinking income levels your risk appetite reduces. The challenge is to use bonds or debt funds to consistently keep reducing and tweaking the average risk of your portfolio. In the pecking order of assets, equities have the highest risk and debt funds carry much lower risk as they invest in assured return debt products and are less volatile. This makes debt funds ideal candidates to reduce overall risk of the portfolio.