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14 May 2021

Bonds and Asset Allocation

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Fixed income offers steady returns for risk averse investors and financial advisors allocate assets to fixed income for both portfolio balancing and regular cash flows. Fixed income encompasses bank and corporate deposits, government small savings schemes, mutual funds and insurance products, bonds and other structured products. Investors are exposed to bonds indirectly as mutual funds and insurance companies invest in bonds. Investors can also invest directly in bonds as part of fixed income allocation.

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Arjun Parthasarathy

Allocating assets to fixed income

Fixed income offers steady returns for risk averse investors and financial advisors allocate assets to fixed income for both portfolio balancing and regular cash flows. Fixed income encompasses bank and corporate deposits, government small savings schemes, mutual funds and insurance products, bonds and other structured products. Investors are exposed to bonds indirectly as mutual funds and insurance companies invest in bonds. Investors can also invest directly in bonds as part of fixed income allocation.

 

Advantages of bonds for asset allocation

Bonds literally come in various shapes and sizes and can seamlessly fit into an investor's financial profile. Cash flows can match requirements and risk is graded to suit the risk profile of the investor. Bonds do not carry any expenses and returns fully accrue to the portfolio.

Bonds also give a large number of choices. Central government bonds, state government bonds, corporate bonds, municipal bonds, infrastructure bonds, rents, invites, MLDs, covered bonds, credit enhanced bonds are choices available to investors. There are many more structured bonds for more sophisticated investors.

Bonds with their choices and flexibility make a good fixed income investment as part of overall asset allocation.

 

Disadvantages of bonds

Bonds can prove to be high risk investment when an issuer defaults on payments. Corporate bonds are not very liquid and unlike equities that provide real time prices online, there are not many online prices available for price discovery, the cost of investing can be high eating into overall returns of the portfolio.

Bonds may not offer tax benefits and reinvestment of cash flows could be an issue if interest rates fall. Bond pricing, while fairly simple as cash flows are discounted, may not be understood by all.

 

 

 

 

INRBonds offers good price discovery of bonds, enables liquidity, provides pricing and also highlights risk through proprietary models for investing in bonds for asset allocation

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