Diversifying your bond investments

Is diversification necessary

Bonds carry risk of default, illiquidity and fall in prices. Bond investments are also on the larger side unlike equities where smaller amounts can be invested. For example, you can buy 1 equity share for and low as Rs 100 while in bonds, minimum amount can even be Rs 1 million. Holding bonds of the same issuer or issuers of one particular sector exposes you to higher risk of capital from either default or illiquidity or fall in prices. Hence diversifying bond investments gains importance.

Where to diversify

Diversification can be issuer wise, group wise, sector wise, risk wise and other factors. On an issue wise basis, more number of issuers help in diversification. However, one promoter group may have many different entities that issue bonds and holding different issuers but from same group is not full diversification. It is good to diversify across promoter groups.

Financial services dominate bond issuances and bonds of different issuers and promoter groups but of only financial services leads to sectoral concentration. Diversifying into other sectors willl reduce sectoral concentration. In terms of risk, holding bonds carrying guarantees or having other profiles in terms of credit enhancements or other such risk mitigation factors, portfolio concentration of such risk profiles can be avoided through diversification.

How to diversify

In a spreadsheet, list out your bond holdings and mark the issuer, group, sectoral, risk and other such factors. Check if the portfolio is concentrated in one particular category and if so then do not add more bonds belonging to that category.

A simple diversification table is given here

INRBonds can help you diversify your portfolio through its powerful Marketwatch function.

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