While planning an investment portfolio, people often confuse investments with equity. Yes, equity is an important part of an investment corpus, but so are debt market instruments. Just like a well-balanced diet is important for a healthy lifestyle, an investment portfolio needs to have a proper mix of both equity and debt market instruments. With the fall in interest rate over the last couple of years, fixed income or debt investments have become significantly less attractive. However, a smart strategy to creating a healthy investment portfolio is to have adequate proportions of both equity and debt investments depending on your risk profile.
Regardless of the economic environment, there are some inherent benefits of debt investments that makes them an integral part of an investment basket.
Key benefits of fixed income investments
✓ Assured Income: Even as you invest for wealth creation over the long run, it is also important to create a regular source of income. Most bonds pay interest (at fixed rate) on a regular basis which is either yearly or half yearly. You can however opt to reinvest the same if you do not need a steady flow of income. The Indian bond market offers a variety of products to suit various needs.
✓ Stability: Every investment carries some degree of inherent risk. Fixed income investments are less risky when compared to equity investments as they provide capital protection.
Since fixed income investments are a debt investment, they work on the basic principle of repaying the amount of money that was originally invested at the time of maturity. This means there is little fear of losing the original capital. Thus, fixed income investments provide a sense of stability to the overall portfolio.
✓ Liquidity: There are various types of debt investments that provide high liquidity. You can choose debt instruments based on your liquidity requirement. For example, liquid funds and short-term debt funds can be considered as short-term investment products.
✓ Indexation benefit: Unlike equity investments, some debt investments provide indexation benefit to its investors if the period of holding is three years or more. This provides significant tax relief from the capital gains.
✓ Diversification: Usually, prices of equity and debt investments move in different direction. Due to the inverse relationship, fixed income investments can be a valuable addition to your portfolio and provide a hedge against equity. Government bonds, private bonds, fixed maturity plans and bank deposits etc. are some of the popular fixed-income investment choices available to diversify your portfolio.
It is also important to consider the credit quality, interest rate volatility and economic cycles in a debt market. Here we look into why debt investments matter.
Introduction to debt market
The Indian debt market is one of the largest in Asia. In a developing country like India, debt market is an important source for raising finance.
✓ The Indian government raises money for all their developmental activities through the debt market. In order to finance various developmental activities, the government (both central and state) issue bonds to borrow money. Government securities are issued by the Reserve Bank of India on behalf of the government.
✓ Debt market can also help control inflation. A reduction in the interest rate for government securities increases liquidity in the market as investors reduce buying bonds. The opposite holds true as well.
✓ An efficient debt market helps in effective mobilization and allocation of resources in the economy. Investment in debt market mobilizes the idle household resources which would otherwise not be a part of the money in circulation. With a rise in interest rates, the idle money can be put to use, thereby increasing the government’s corpus. Thus, effective mobilization and resource allocation leads to economic efficiency and growth.
To sum up, there are various benefits of debt investments. For one, debt market offers various investment opportunities. Debt investments play a vital role in building a well-balanced portfolio. Irrespective of economic conditions and market trends, it is important to have an ideal mix of stocks and debt investments based on your investment objective and risk profile.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.