DIVERSIFY WITH DEBT

Indian investors can choose from diverse bond funds for stability and income, while managing potential risks

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Cyclicality is an inherent characteristic that shapes the performance of asset classes. While broad economic conditions influence most asset classes, each is also affected by unique factors. During an expansionary phase, equities tend to perform well as corporate earnings exceed expectations, driving market rallies. In fixed income, the interest rate environment plays a crucial role - when interest rates have a downward bias, as is currently the case, bond prices tend to rise.

Meanwhile, during periods of heightened economic uncertainty - whether due to geopolitical tensions or financial instability - precious metals, particularly gold, often outperform as investors seek safe-haven assets.

Understanding the nuances of each asset class and making strategic investment adjustments requires professional expertise. Diversification remains one of the most effective ways to manage risk and hedge against market volatility. As legendary investor John Templeton wisely noted, “The only investors who shouldn't diversify are those who are right 100% of the time.”

The importance of having bonds in one’s portfolio cannot be understated, particularly in times of equity market turbulence driven by weak earnings, foreign investor withdrawals, and geopolitical uncertainty. In such conditions, bonds play an important role in providing stability and preserving capital, reinforcing their significance in a well-balanced investment portfolio.

WHAT ARE BOND FUNDS?

In India, bond funds - also known as debt mutual funds - primarily invest in fixed-income instruments such as government bonds, corporate bonds, treasury bills, and commercial paper. Investment decisions are guided by the scheme’s objective, which is clearly outlined in the scheme information document provided by the fund house.