How To Diversify Your Portfolio With Corporate Bonds And SDIs

When you start investing your hard earned money for your future, it is advisable to create an investment portfolio. An investment portfolio is  a collection of assets, which is built by investing in various asset classes instead of sticking to only one. When investing in different asset classes for your portfolio, always factor in your financial goals and risk appetite.

Below are the key elements of a strong investment portfolio:

1. Diversification: This means investing in a variety of asset classes such as stocks, bonds and cash. This helps in the creation of a portfolio which is less vulnerable to changing economic conditions or trends in the market.
2. Balanced Risk And Rewards: The risks associated with the investments should be in line with the objectives and the degree of your tolerance of risk.
3. Cost And Tax Efficiency: It is imperative that the costs of the owned assets should be kept to a minimum to avoid any increased expenses. The motive should be to minimize the taxes by availing the deductions available and maximize the gains.
4. Simple And Easy To Manage: You must understand the purpose of every asset in which you invest and why that asset is good for your investment portfolio. Also, avoid investing in complex investment vehicles whose concept,risks,returns, regulations, etc you do not clearly understand.

Risk Involved In Market-Linked Instruments

There is a certain degree of risk that is associated with investing in market-linked instruments. Below is a list of some of these common:

1. There is always a risk of loss when you invest in market-linked products, since the investor could end up losing the entire amount that he had invested.
2. There are some secondary market risks involved when an investment is sold prior to its maturity, since there may not be a liquid secondary market for that product.
3. There are also some legal risks involved when holding market-linked instruments, such as regulatory and tax considerations that may undergo a change during the term of the investment.
4. You must read all the offer documents carefully to ascertain the additional details related to the fees and the built in costs. 

Additionally, there are some issuer considerations which depend on the structure of the product, including credit risks associated with making an investment in the principal protected or non-principal protected notes, and bankruptcy risk which may mean non-repayment of the investment. Some complex features and the underlying security considerations of market-linked investments may include the market risk, income risk, payout features, call features and the foreign currency risks.

How Diversification Can Help You Hedge Against Market Volatility?

You must always diversify your portfolio in order to protect yourself against market volatility. By hedging, you could protect yourself against the industry-specific risk which is inherent to each security. For example, an unsystematic risk for a company which deals in cars would be the product recall, but this would not be the same for the entire automobile industry or the overall economy.

Following are some ways of diversifying your investment portfolio:

1. Avoid Investing In Lump Sum: You should avoid investing in lump sum. The market returns on these investments are usually attractive and so, these may seem lucrative but you could end up incurring losses if you invest a big chunk of money in one go, into market-linked investments. You can try investing smaller amounts into multiple asset classes.
2. Investing in Mutual Funds: Systematic Investment Plans or SIPs are designed to hedge against volatile markets. Investment in mutual fund SIPs can make sure that a fixed amount of investment is made at regular intervals, irrespective of the market conditions. Therefore, over a period of time, you will benefit from Rupee Cost Averaging. Through SIPs, you need not worry about timing the market. 
3. Diversify In Different Ways: Portfolio diversification can be done in different ways. For example, you can go for diversification across different asset classes. You can decide to invest 50% in equity mutual funds,  20% in debt mutual funds, 20% in stocks, 5% in corporate bonds, and 5% in fixed deposits. Another way of diversification would be to diversify within an asset class. Like if you want to invest in equity mutual funds, you can invest across different equity mutual fund categories such as small cap funds, mid cap funds and large cap funds.
4. Diversification Of Debt Instruments: Mostly investors want to concentrate more on equity when it comes to diversification of their portfolio. But when they choose the debt category, they would choose a debt mutual fund which is secure or would invest directly in some of the debt instruments, without considering the correlation between them. So when you opt for debt instruments for diversification, don’t just blindly do it. Make sure you understand the category and instruments you are choosing to invest in, such as corporate bonds, debt mutual funds, SDIs, etc.

What Are Debt Instruments And Their Advantages?

A debt instrument is a legally enforceable agreement, which is entered into between two parties, one being the lender and the other being the borrower. This is an agreement which includes the repayment through periodic payments of interests, with the final payment being the periodic payment of interest which usually takes place over a set period of time. Debt instruments are either backed by a collateral or rely on the credit worthiness of the borrower.

Types of debt instruments include treasury bonds, corporate bonds, municipal bonds, loans such as personal loans, mortgage loans, auto loans, commercial paper, certificates of deposit, debentures, SDIs, etc.

Debt instruments have the following advantages:

1. They offer steady income returns and hence, are recommended for the investors that do not want to take risks. They provide stability to the investment portfolio.
2. There are some of the fixed income securities that offer competitive returns, which may sometimes exceed interest on savings accounts and the traditional bank deposits.
3. They are highly liquid in nature which would allow you to redeem your investments as and when you like.
4. The debt instruments that are backed up by the government, are safe for the investors and their capital. They also protect the investors against any changes in the market conditions and credit risks.
5. There are some of the debt instruments that help you in saving taxes.

What Are Corporate Bonds And SDIs And What Are Their Benefits?

SDIs (securitized debt instruments) are the securities that represent a pool of income generating assets, including loan receivables and real assets. The income that is generated from these assets are then distributed amongst the security holders. For this, the process of securitisation is followed that includes transforming illiquid assets into marketable securities, that are then sold to the investors. The advantages in investing in these include diversification (it helps in diversification of fixed income portfolio and helps in balancing risks with rewards) and high yield (it gives higher returns when compared with the traditional fixed income investments). 

Also, there are predictable repayments and they provide a high liquidity  for the investors. For instance, LoanX by Grip Invest allows investors to receive regular returns by investing in a diversified pool of loans through credit-rated, exchange-listed, and SEBI-regulated opportunities.

On the other hand, a corporate bond is an agreement whereby a corporation would give some interest over a period of time, in exchange of money lent by the investor. A corporate bond is usually traded by a public company. The advantages of investing in corporate bonds include regular cash payments in the form of interests, less fluctuation in their prices, yield which may go beyond that the government bonds gives and an access to the secondary market.

For more information on corporate bonds and SDIs, read this article. 

Corporate Bonds Vs SDIs 

*Investment-grade bonds (BBB and above) on Grip give returns up to 14%. Non-investment grade bonds can offer even higher returns, however they come with higher risk. 

Conclusion

If you believe that the markets are currently volatile and that they will stabilise over time, and you want to stay invested in the meantime, then it is highly recommended that you diversify your portfolio. Diversifying your portfolio will not only help you reap tax benefits, but you will also get an increased return on your investment and hedge yourself against market volatility.

Also, always keep in mind your financial goals, returns, risk appetite, and the investment horizon before investing in any asset class.

Frequently Asked Questions About Diversification

1. Why should you diversify your portfolio?

Diversification in your portfolio is necessary in order to safeguard yourself against the fluctuations in the market conditions and to strike a balance between risk and returns.

2. What is the Importance of hedging?

Hedging your portfolio is important to protect your investments from any potential losses due to price fluctuations.

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Disclaimer - 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. The investor is requested to take into consideration all the risk factors before the commencement of trading.
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