Guidelines for Constructing a Robust Bond Portfolio on Your Own

Guidelines for Constructing a Robust Bond Portfolio on Your Own

In periods of escalating equity markets and a growing interest in small- and mid-cap stocks, the importance of fixed-income investments is sometimes overlooked. However, it’s crucial to acknowledge that debt investments are as significant as equity. Here lies the challenge.

While investing in debt mutual funds is straightforward, opting for direct investment in debt instruments poses awareness hurdles.

Constructing a bond portfolio faces obstacles:

  1. Market Dynamics: Unlike buying equity shares, direct investment in bonds faces challenges in the wholesale or institutional-oriented secondary market. Deals occur in large sizes, making them inaccessible for the general public. The primary participants are major entities such as banks, insurance companies, mutual funds, and large corporate treasuries, excluding individual investors.
  2. Limited Accessibility: Corporate bond deals are predominantly negotiated within specific circles, often over the phone. This lack of transparency results in a scarcity of ready two-way quotes for securities.

Efforts have been made to enhance retail participation, such as the Reserve Bank of India’s (RBI) Retail Direct gilt platform. Yet, this platform focuses on government securities and sovereign gold bonds, excluding corporate bonds. To trade corporate bonds, individuals must engage with bond dealing houses, introducing complexities not present in equity trading.

However, progress has been made with the emergence of Online Bond Provider Platforms (OBPPs). These platforms offer low trading lot sizes, enhancing affordability and convenience for individual investors to build their bond portfolios.

Considerations when building a bond portfolio:

  1. Liquidity: Selling bonds requires careful consideration of liquidity. Unlike equity trading apps with a vast array of stocks, OBPPs offer a limited selection of bonds. Ensuring that your chosen bond is listed for potential buyers and understanding the platform’s purchase price dynamics is crucial.
  2. Choice of Bonds: When selecting bonds, some investors prioritize yield, similar to sorting flight tickets based on cost. However, in bonds, credit quality is paramount. Corporate bond credit quality is often assessed through credit ratings, with AAA being the highest. Beyond ratings, factors like company reputation, business model, and promoter goodwill should influence your choice.

Choosing Between STP, SWP, or SIP: Finding the Right Investment Strategy

As the market deepens and attracts new investors, constructing a bond portfolio is more accessible. However, vigilance regarding the credit quality of chosen bonds remains essential.

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