Have you ever considered investing your savings into , especially at times when you need the money after just a few months? The financial news that we hear of is dominated by updates on equity markets. The world of investing into bonds, therefore, can seem complex and unapproachable for the average investor.
The second episode of Mint Bond Street Dialogues saw Vishal Goenka, Chief Executive Officer (CEO) of IndiaBonds talk to Neil Borate, Editor-in-Chief of thefynprint about the fundamentals of bond , explaining how this asset class is essential for creating a balanced portfolio and achieving specific financial goals. Goenka’s insights reveal that bond investing should form a core component of any investment portfolio, regardless of its size.
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Goenka recommended a typical allocation of 20 per cent to , which can be increased to 30-35 per cent for those with a more conservative risk appetite. This allocation, he says, is critical for providing stability and a buffer against the volatility of equity markets. It ensures that whatever the size of your total investments, a significant portion is working to secure predictable returns, acting as a crucial safety net and foundation for financial planning. One of the key advantages of investing in bonds is that the bond strategy can align with specific financial objectives, whether you are looking at short-term, medium-term, or long-term goals.
For short-term investment goals (less than 1 year)
For short-term needs such as saving for an upcoming holiday, paying school fees or building an emergency corpus where you need to invest for less than one year, Goenka recommended Treasury Bills or T-bills. “I literally urge people to stop keeping money in current and savings accounts, even if you have money for three to six months or nine months, and buy a treasury bill,” he said.
T-bills are essentially short-term government bonds, which are virtually risk-free as they are issued by the Government of India, and they offer a higher return (currently around 5.5 to 5.75 per cent) compared to a typical savings account. This combination of safety and superior yield makes them ideal to park funds in the short-term. Furthermore, T-bills are highly liquid, allowing for easy buying and selling, and their accessibility has improved significantly.
In response to Borate’s question on how one can buy a T-bill, he said: “There are multiple platforms that you can go to. There is RBI Retail Direct, which the government started where you can just click and buy. You can also buy on online bond platforms like ours or others, and click and buy a table. The only difference is, when you buy an RBI retail direct, it’s something called an SGL account which is a note within RBI that you own, and when you buy it on an online bond platform, it comes in DMAT form, so you can see the statement right along with all your other stocks.”
A big convenience is the fully automated process – when a T-bill matures, the principal amount is automatically credited back to the investor’s linked bank account, requiring no manual action.
For medium-term investment goals (1-5 years)
For investors with a 1-5 year investment horizon, such as saving to buy a car in three years or accumulating a down payment for a house, Goenka suggested exploring different corporate high yield bonds. Depending on the credit rating of the issuer, such bonds can offer attractive returns in the range of 9-11 per cent, which is significantly higher than what is typically available from bank fixed deposits.
However, this higher return comes with a crucial caveat: credit risk. Therefore, Goenka strongly advised investors to stick to AAA and AA-rated bonds, where default rates in India have been practically zero over the last few years. He explicitly cautions individuals against investing in bonds rated below triple B minus. Beyond the coupon payments for regular cash flows, corporate bonds offer a valuable tax efficiency feature.
For long-term goals (over 5 years)
Financial planning for long-term life events like retirement planning or funding a child’s higher education, long-duration bonds are a good choice. For the highest security, Goenka recommends government securities (G-secs), which are considered risk-free and currently offer yields to the tune of 6.6-6.9 per cent on the long end. Investors can also look at State Development Loans (SDLs), which carry the same central government guarantee but typically offer a yield 40 to 75 basis points more than equivalent G-secs, providing a slightly higher return without increased risk.
Another advantage of long-tenure bonds is the opportunity for capital gains. “Longer tenure bonds are more sensitive to interest rates, and if interest rates are cut, the value of the bond rises, and therefore you get capital gains. So if you sell the bond before maturity, then that rise in the bonds prices taxed at the long term capital that is right, gains rate, which is 12.5 per cent, and it can be much lower than the slab rate,” he explained.
Key strategies and risks
Goenka identified three main categories of risk associated with investment in bonds. These include credit risk, which is the risk that the issuer defaults on their payments, market risk which is the risk that rising interest rates cause a bond’s price to fall, and liquidity risk which is the risk of being unable to sell a bond quickly or at a fair price.
To actively mitigate one of these risks, specifically interest rate risk, Goenka said: “The strategy is very simple. It is called laddering. If you are not a champion, and you don’t want to be a champion on where the interest rates go up or down, you should have fixed income in your portfolio at all points of time. You just spread out the maturity.”
For example, investing equal amounts of money in one-year, two-year, three-year, four-year and five-year bonds. By staggering the maturities, a portion of the portfolio is constantly maturing, allowing the investor to reinvest the principal at the prevailing interest rate, thus hedging against significant changes in the rate cycle.
When it comes to assessing and managing credit risk, Goenka said that while AI models are useful for analysing complex financial documents, they cannot replace human due diligence. He advises investors to be vigilant and informed, stating that the best early warning signs of credit deterioration are often visible.
“If a company has a big, steep downfall or downward move in equity, that’s a flag you should take. Secondly, rating downgrades or rating outlook is very important, so a company could be single A rated but if it is a negative outlook, which means the rating agencies are thinking that the next move will be downgrade or deterioration in credit,” he said.
In conclusion, Goenka provided a powerful roadmap for simplifying bond investing for the average Indian investor. By understanding the different types of bonds and how they can be aligned with personal goals, individuals can use this asset class to build a resilient and secure financial future.
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Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The views expressed in this article are those of the author and do not necessarily reflect the views of HT Digital Streams Ltd or its affiliates.