If you plan to add listed bonds to your fixed-income portfolio, these two risks should be considered. As financial markets worldwide have become increasingly unstable in recent weeks, ‘boring’ bonds have resurfaced. Investors may be debating whether or not to include bonds in their portfolios. Assume you have roughly 30% of your current wealth portfolio invested in a mix of debt funds, FDs, and debentures. However, you might wish to add an extra buffer given the current situation. Adding some high-quality bonds to an existing fixed-income portfolio appears to be a solid option for most investors.

However, if you ask us, we think it’s better to hire an advisor or invest in dependable bond and debt funds. We’ll explain why in the following paragraphs. Bonds give you the option of owning an asset that pays you a monthly income while also allowing you to move in and out at your leisure. Despite their supposed safety in earnings, Bonds and debentures come with their own set of risks.

You should be aware of this if you’re thinking about adding bonds to your fixed-income portfolio. The regular revenue from interest payments is known in advance, but there is always the possibility of default unless the government backs the bond. Buying and selling listed bonds entail two distinct risks. 

Before you start looking for bonds to invest in, here’s what you should know:

• The First Threat Is The Risk Of Interest Rates

This is the most significant risk associated with bond investing on the secondary market, and it impacts even the most secure government-issued bonds. So, even if you have done your homework and bought the best AAA-rated bond, you’re still in danger. Bond prices are calculated as the market price daily once they are listed. Bond market prices move in the opposite direction of interest rate changes. The interest rate on the bond you buy does not fluctuate; instead, market interest rates and expectations change. Because of the expectation of a rate hike in a rising rate cycle, such as the one expected in 2022, the price of the bond you own can plummet. This occurs because, in the event of an increase in interest rates across the economy, new bonds of the same duration and quality will give a more excellent coupon, while older bonds will fall out of favour.

When there is a falling rate cycle, older higher coupon bonds are in high demand, and their price in the secondary market rises. While making your decision, the risk is less significant when buying; nevertheless, if you sell at the wrong end of the interest rate cycle, you may lose money.

• Liquidity Risk Is The Second Threat

The inability to exit is another vital risk in secondary markets when you wish. This can occur if there is no demand for the bonds or no one wants to buy them. The lack of liquidity and even depth in the Indian bond market is well-known. This means that there are not enough daily transactions for the existing listed bonds, volume is low, and there is a lack of options for buying bonds within a category.

When you wish to buy, the risk is negligible because you will ultimately acquire whatever is available in the market on the day you want to invest. However, when it comes to selling, a lack of liquidity can affect the price you receive per bond or possibly cause the sale to be postponed. When buying and selling stocks in the equity market, you should keep in mind that most large and mid-cap stocks have enough liquidity to match transactions regularly. This is not the case with bonds issued (and listed) by the same large and mid-cap firms.

• Takeaway Before You Decide

These threats appear to be a disincentive to investing in bonds on the secondary market. Similarly, if you want to take advantage of bond rates and are interested in listed bonds for their flexibility, hiring an advisor is your best option. In terms of market data, good financial advisors have an advantage over investors. They can successfully steer you to high-liquidity bonds and provide advice on interest rate cycles.

The other option is to invest in dependable and high-quality bond or debt funds, which significantly minimise the amount of labour required and are a far easier method to add bonds to your portfolio. Because of their experience and ability to manage liquidity, the fund managers are significantly better positioned to address these two risks.