Predictable Returns Without Equity Market Volatility
Fixed income instruments - bonds, debentures, fixed deposits, debt mutual funds - provide contractual returns without stock market gyrations. Government securities offer sovereign safety, AAA corporate bonds provide higher yields with minimal default risk, and bank FDs give guaranteed returns with DICGC insurance up to ₹5 lakhs.
These work for capital preservation, regular income needs, and portfolio portions you cannot afford to lose. The trade-off is lower long-term returns than equity - typically 6-9% versus equity's historical 12-15% - but that's the cost of certainty.
Interest Rate Risk and Credit Risk Aren't Eliminated
Fixed income isn't risk-free, just different risks. Bond prices fall when interest rates rise - if you bought a 7% bond and rates jump to 9%, your bond's market value drops because new bonds pay more. Credit risk means the issuer might default - IL&FS, DHFL, and other "safe" AAA-rated companies have collapsed, wiping out investor capital.
Longer duration bonds face more interest rate volatility, while higher-yield bonds carry more default risk. Bank FDs avoid market risk but lose purchasing power to inflation - 6.5% FD returns minus 6% inflation gives you 0.5% real return before tax.
Laddering and Duration Matching Beat Chasing Yields
Building fixed income portfolios requires matching investment duration to your goals and laddering maturities to manage reinvestment risk. Don't chase 9% returns from unknown NBFCs when government securities pay 7% - the extra 2% isn't worth default risk. Tax-efficient debt mutual funds work better than FDs for investors in 30% brackets, despite recent indexation changes.
Corporate bonds from genuinely creditworthy issuers (think top PSUs, blue-chip companies) offer a middle ground. The goal is preserving capital and generating predictable income, not gambling on high-yield junk for an extra 50 basis points.
