Bond platforms are becoming popular in India. Thanks to many finfluencers, bond investments are recommended to the “retail investor”. I had recently published a video in English – Do not buy bonds unless you need an income! and in Tamil – வருமானம் தேவையில்லை என்றால், பத்திரங்களை வாங்க வேண்டாம்!
In these videos, I argued that unless you are retired or have quit your job to create a start-up or freelance, you do not have income. And therefore, you do not need income products such as bonds. Even if you need income, do not buy corporate bonds. Stick to RBI and GOI bonds.
While most viewers agreed with me, some people argue that secured (corporate) bonds are safe because assets will be sold to pay investors if the business folds, and that senior secured bonds are even safer because those investors will get priority.
This is simplistic to say the least. A single court case (an ownership dispute, fraud claims, etc.) can halt the sale of the underlying assets and delay payments to investors for months or even years. “Seniority” means nothing! Examples: Dewan Housing Finance Corporation (DHFL), Bhushan Power & Steel Ltd. (BPSL), Jet Airways, Videocon Industries, Satyam Computers Services.
Finfluencers parrot what bond portals ask them to do in exchange for money. Please do not trust anyone blindly. This includes me as well. I am also capable of mistakes, but at least you can be sure that no one paid me to make them.
The second bizarre comment was to park a Lump Sum in Bonds and Invest Only the Interest in MFs! My understanding is that this is being suggested to those who are scared of entering the equity markets or who do not wish to enter during a bear or sideways market.
This is silly! If you want to change your life and become wealthy, you need to invest 50-60% of what you can in equity. You cannot say I want to learn swimming, so I will sit by the pool, put my feet in the water and flop around. Nothing much is going to happen.
If you do not take risks, you will not create wealth. Those risks must be reasonable, with sufficient capital and time to manage them. If you have a lump sum, do a proper goal-planning exercise, decide on an asset allocation (how much equity and how much in fixed income) and allocate the lump sum in that ratio.
You don’t need to invest the lump sum into equity MFs in one shot. You can stagger and invest it over several weeks or even months (A STP is not necessary). Remember, the market will fall only after you invest! So get used to it.
Yet another comment I saw was, “You cannot beat inflation with GOI bonds!”. Baffling! You do not use bonds to try to beat inflation. Before retirement, you beat inflation with a growing income. After retirement, you beat it with a sufficient and well-managed corpus. Buying high-interest-rate bonds to “beat inflation” is an extremely risky idea and should be avoided.
Fixed income options other than bonds when retirement is far away?
EPF, PPF, NPS (C and G options), Debt Mutual Funds (liquid, money market, corporate bond, gilt, etc.), Select hybrid Funds. Consult our handpicked list of mutual funds (PlumbLine) for suggestions.
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
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