How Should Investors Approach Bonds Now?

With interest rates, inflation and global energy prices keeping bond markets on their toes, investors may find it difficult to decide whether to invest in bonds now or wait for better yields.

The Reserve Bank of India (RBI) has kept the repo rate unchanged at 5.25%, while uncertainty around global inflation and energy prices continues to influence the interest-rate outlook. In this environment, the approach to fixed-income investing becomes just as important as the yield being offered.

According to Dhawal Dalal, President & CIO – Fixed Income at Edelweiss Mutual Fund, investors may benefit from taking a staggered approach rather than putting a large amount into bonds at one go. He also sees 2–3-year AAA-rated bonds and money-market instruments as attractive options in the current environment.

Why stagger bond investments?

One of the biggest questions for bond investors today is whether to lock in the yields available now or wait for rates to move higher.

Trying to perfectly time interest rates can be difficult. If rates rise later, investors who invest their entire amount today may miss the opportunity to lock into higher yields. On the other hand, waiting indefinitely can also mean missing attractive opportunities in the current bond market.

A staggered investment strategy offers a middle path.

Instead of investing the entire amount at once, investors can spread their bond investments over the next few months. This can help them average their entry levels and keep some money available if better opportunities emerge.

Dalal suggests staggering investments in high-quality bonds over a period of around three to four months.

Why AAA-rated bonds are getting attention?

Credit quality is an important consideration when investing in corporate bonds.

A higher yield can look attractive, but it usually needs to be evaluated alongside the credit risk of the issuer. Investors should therefore avoid looking at the interest rate alone and also consider the issuer's financial strength, credit rating, repayment ability and overall risk profile.

In the current environment, Dalal favours 2–3-year AAA-rated bonds, citing their risk-reward profile.

For investors who want to explore corporate bonds, this highlights an important principle: higher yield should not come at the cost of ignoring credit quality.

Shorter maturity bonds may offer flexibility:

Bond prices and yields are influenced by changes in interest rates. When rates move, the impact can vary depending on the maturity or duration of a bond.

With uncertainty around the direction of interest rates, shorter to medium-term bonds can offer investors greater flexibility compared with taking large positions in long-duration securities.

Dalal's preference for 2–3-year AAA-rated bonds reflects this approach, while he remains positive on money-market instruments because of their spreads over the repo rate.

What about government bonds?

Government securities are generally considered among the higher-quality fixed-income instruments because they carry sovereign backing. However, that does not mean they are immune to market movements.

Dalal is currently underweight on government bonds, pointing to demand-supply dynamics and the relatively tight spread between India's 10-year government bond and the 10-year US Treasury.

For investors, the takeaway is simple: even within fixed income, different categories can perform differently depending on interest rates, liquidity and market conditions.

Don't chase yield without understanding risk

One of the most important lessons for bond investors is that a higher coupon or yield does not automatically mean a better investment.

Online bond platforms have made it easier for investors to discover bonds offering different interest rates. But before investing, it is important to look beyond the headline yield.

Investors should consider:

• Credit rating and credit quality

• Issuer's financial position

• Maturity period

• Yield to maturity (YTM)

• Interest payment structure

• Liquidity

• Secured or unsecured nature of the bond

• Overall portfolio allocation

A bond offering a higher yield may carry higher credit or liquidity risk. The right choice therefore depends on an investor's objectives, time horizon and risk appetite.

A practical approach for bond investors

The current market environment does not necessarily call for an all-or-nothing approach.

Instead, investors can consider building their fixed-income portfolio gradually and diversifying across suitable instruments and maturities.

For someone looking at a 2–3-year investment horizon, high-quality corporate bonds can be one part of a diversified fixed-income allocation. Money-market instruments and other debt products can also play a role depending on the investor's requirements.

The broader message from Dalal's strategy is to stay selective, focus on quality and avoid trying to predict the exact top or bottom of the interest-rate cycle.

What does this mean for bond investors?

The bond market continues to offer opportunities, but the strategy matters.

With the RBI repo rate at 5.25% and the future path of interest rates still uncertain, investors may want to avoid making large one-time bets based purely on expectations of where rates will move next.

A staggered approach, focus on high-quality bonds and careful assessment of credit risk can help investors build a more balanced fixed-income portfolio.

For investors exploring bonds, the key is not simply “What is the highest yield available?” but rather “Is the yield appropriate for the level of risk I am taking?”

That distinction can make a meaningful difference when building a long-term fixed-income portfolio.

Key Takeaways:

• RBI's repo rate currently stands at 5.25%.

• Investors may consider staggering bond investments rather than investing a large amount at once.

• Dalal favours 2–3-year AAA-rated bonds in the current environment.

• Money-market instruments remain attractive due to their spreads over the repo rate.

• Investors should evaluate credit quality before chasing higher yields.

• Diversification across maturities and instruments can help manage fixed-income risk.

Source: Economic Times, ETMarkets Smart Talk, 

https://economictimes.indiatimes.com/markets/bonds/etmarkets-smart-talk-dhawal-dalals-fixed-income-playbook-stagger-bond-bets-favour-aaa-debt/articleshow/133284956.cms

Image Source: Canva.com

Disclaimer:

JM Financial Services Ltd. | Corporate Identity Number: U67120MH1998PLC115415 | For registration details and disclaimer, please visit [www.jmfinancialservices.in](http://www.jmfinancialservices.in)

Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities, municipal debt securities/securitised debt instruments are subject to credit risks, market risks and default risks including delay and/or default in payment. Read all the offer related documents carefully. The securities are quoted as an example and not as a recommendation. Investments in debt securities, municipal debt securities/securitised debt instruments are subject to risks, including delay and/or default in payment. Read all the offer related documents carefully. Investments in securities market are subject to market risks; read all the related documents carefully before investing.

Bondskart is an online platform for bonds buying and selling provided by JM Financial Services Ltd. under a Separately Identifiable Division/Department as per the SEBI circular on Registration and regulatory framework for Online Bond Platform Providers dated November 14, 2022.