The equity markets have gone up by almost 20 percent over the last six weeks, and are consolidating close to crucial levels. The markets are expecting a direction from the global markets for a decisive breakout from the current range. Since the markets are in a consolidation mode, investors are advised to review their portfolios and make the necessary changes in terms of profit booking, and cutting loss. Investors can also rebalance their overall investment portfolios with respect to investments in equity and debt instruments.

What is a bond?    

A bond is a debt instrument issued by the government or a corporate house to raise funds from the markets. A bond has a specific maturity date which can range from a few days to many years. Based on the maturity period, it can be a short-term bond or a long-term bond.

   A bond has a fixed maturity value. It is based on the type of bond. There may or may not be regular interest payments, known as coupon payments. Large institutions such as banks, mutual funds and foreign funds are some of the large investors in government and corporate bonds.

   Individual investors mainly invest in bonds taking the debt-based mutual funds route, or directly in corporate bonds or tax-saving bonds.

Who should invest in bonds?    

All investors should have some exposure to bonds. The percentage of allocation to bonds can vary based on the risk profile of the investor. Including debt-based instruments brings stability to the overall investment portfolio of an investor.
   Some bonds also qualify for tax rebate and hence their overall returns net of taxes become quite attractive.

Advantages of debt instruments    

Interest rates have reached their peak levels and expectations are the Reserve Bank of India (RBI) will go for some monetary softening, going forward. Investments in debt based instruments seem quite attractive from many perspectives such as capital preservation and risk returns ratio. Capital appreciation is intact even if interest rates go down in the future.

   Investors with a low risk appetite can reduce exposure to equity and rebalance the portfolio by investing in debt based instruments.

   Here are some options in bonds:

Debt funds    

These instruments are good options for investors with a low risk appetite. These funds invest in debt based instruments and government bonds.

   Therefore provide safety of principal with decent returns. These funds come without any lock-in such as bank fixed deposits. They offer quick liquidation and hence come in handy for those wanting to invest with a short to mediumterm perspective without any investment risk.

   Since interest rates are up, debt-based instruments are attractive from many perspectives such as capital preservation, low risk, high returns and the possibility of capital appreciation if the interest rates go down in future.

Liquid funds    

Liquid funds are good for investors who want to park their funds for a short term. These funds invest the corpus mainly in money market instruments, short-term corporate deposits and treasury. Liquid funds can be liquidated on a very short notice. Therefore, they score over other short-term deposits.

 
   Returns from bank fixed deposits are taxable depending on the tax bracket of the investor, which pulls down the actual returns considerably. Dividends from liquid funds are tax-free in the hands of the investor. This increases their effective returns.

Tax-saving bonds    

There are various bonds available in the market that qualifies for income tax rebate. These tax-saving bonds come with a lock-in period of five years or more. The returns from these bonds, including the income tax savings, are attractive for investors in higher income tax brackets.