Benefits of Investing in Bonds

Many people have asked me the Benefits of Investing in Bonds. Well, There are basically 2 main benefits of investing in Bonds.

01) Asset Allocation &

02) During the time of Deflation

First is Asset Allocation. Any Portfolio Must have combination of Assets which have negative correlation. Equity & Debt (Bonds) have negative correlation means when Equity market goes up, the Debt market goes down and vice versa. So having 2 or more different Asset Class can provide a stability to your over all portfolio in any market and that’s why an Investor should Invest in Bonds.

Second advantage of investing in Bonds is during the time Deflation such as current time in India. Right now Indian Economy is in Deflation of –1.54%. Deflation means Negative Inflation. Inflation means the purchasing power of your money is reducing because goods and services in the economy are getting costlier day by day. While Deflation is reverse of Inflation.

There is an old saying that, “It is better to be a Lender (Bond/Debt Holder) during the time of Deflation rather than a Borrower.”

Now, there is a Logic behind the above saying. Your actual return from your any Asset = Return offered by that Asset – Inflation.

Now, Suppose Equity gives you 20% return per annum and the Inflation is 5% than your Actual return is 20-5 = 15%.

Say for Example if Bonds give you 8% return & the inflation is 5% than your Real return is just 3%.

Now let us discuss the scenario of Deflation. Suppose Deflation is 1.5% and Bonds are offering you 8% per annum return than your actual return is 8 – (-1.5) = + 9.5%

Understand the Logic….??

This is why you should hold Debt (Bonds) during the time of Deflation. Suppose if today you invest in Bonds than your actual return is + 9.5% even though on paper you get only 8% return.

This is the time of Deflation in Indian Economy so everyone should increase the Debt allocation in their Portfolios…….!!!!!!