Balanced bond portfolio blueprint – The Hindu

It’s always easy to buy a bond. A bond can ‘promise’ regular income but a well-built bond portfolio is a different ball game. It must be able to withstand a default, changing interest rates, and shifting economic conditions. A good portfolio ensures a single issuer’s default does not wipe out a large chunk of your investment.

The starting point is simple: ask yourself when and how much money you need, whether you want periodic interest or capital appreciation and how much risk you are willing to take: risk tolerance. The answers to these questions will decide the bonds you choose, the lock-in period and if at all you need bonds in the first place.

The spread

Don’t let the bond portfolio turn a collection of similar bets. Mix Central and State government securities, Treasury bonds, corporate bonds and bank bonds, and spread the money across issuers, sectors and banks. Government debt can anchor the relatively safer end of the portfolio, while corporate bonds may offer higher yields with a mix of risk and return rather than depend on a single issuer.

Perpetual bonds

Stagger maturities rather than having all bonds mature at the same time. Perpetual bonds have no fixed maturity and can provide regular income but there is no predetermined date for repayment of the principal. They, therefore, need closer scrutiny and are not risk-free.

Interest structure

The interest structure can be diversified too. A portfolio can include zero-coupon bonds, bought at a discount, and pay no periodic interest; alongside fixed-rate, floating-rate and inflation-linked bonds. Convertible bonds offer another option: these hybrid instruments can be converted into a predetermined number of shares of the issuing company.

Credit rating

Before buying, credit rating must be the first warning signal. Higher-rated bonds such as AAA and AA usually carry lower credit risk than BBB, BB or lower-rated bonds. But a rating is no guarantee against loss; read the offer document and assess issuer before investing.

Rebalancing

A bond portfolio needs regular monitoring. Track interest payments, interest rate changes, RBI announcements, developments involving the issuers, and rebalance when allocation drifts from the original plan. Check whether interest payments are made on time, watch out for defaults and track credit ratings. If these alter the risk profile or portfolio’s initial allocation, rebalance accordingly. Review it at least every six months or once a year.

Finally, track the economy. Stay alert for major economic or political developments that might hit issuers. GDP growth, inflation, joblessness, CPI, WPI, Budget and sectoral performance can impact interest rates and bond prices. Follow these along with developments in Indian/global economy to help understand the forces affecting bond holdings.

No single bond, issuer, maturity or credit rating can suit every investor. The objective is to build a combination that matches need for income, capital protection, liquidity and risk. Remember, higher returns generally come with higher risks and even highly-rated debt is not entirely free from risk. Read the key offer document thoroughly, try to make sense of terms and conditions before investing in bonds. A disciplined approach can help ensure that bonds play their intended role.

(The writer is an NISM & CRISIL-certified Wealth Manager and certified in NISM’s Research Analyst module)