There is an old saying: Gentlemen prefer bonds. But today, the one who is chasing a bond is a punter. The large hoardings and half-page ads screaming 9.5% interest on 370- and 490-day tenures are attractive and noticeable. It is more inviting every time the market tanks, but remember that equities give the highest returns over the long term and patience pays when invested in stocks. Gentlemen today prefer a mix of equities and bonds.
One big advantage of buying debt is that an investor can put together a debt ladder, a strategy favoured by evolved investors. They hold bonds with staggered maturities so that they have a portion of their portfolio maturing every year or two. This leads to a win-win situation. If interest rates dip, they still have bonds locked in at higher rates. And if interest rates rise, the proceeds of maturing bonds can be reinvested at higher rates. In a rising interest rate regime, you may get better rates every time an old bond matures to enter into a new one that offers you a higher return. This strategy works well only for active investors who can traverse from one investment to another without distorting their portfolios.
So, which debt instruments should one opt for? Small savings products (NSC, PPF) are no longer attractive. Bank deposits have dethroned them by offering similar tax benefits and higher returns.
