Investing in debt in unstable equity market

Debt markets, also known as bond markets, is a place where government and corporate bonds are bought and sold. There is no exchange on which these transactions happen, instead these are mainly traded by large institutions and banks. Equity markets on the other hand is a place where stocks or shares of companies are bought and sold. These happen on a stock exchange (such as the NSE or BSE) and have higher reach amongst retail players when compared with the debt markets.

Retail participation in the Debt markets have been highly below par as compared to the Equity markets. And much of it has to do with the way debt instruments were traditionally traded. High ticket sizes, illiquid underlying, lower volatility and lower returns are some of the reasons which have kept investors at bay. It is true that the returns in equity markets have beaten the debt market returns over longer periods of time, but the volatility in these returns have also been much higher. This means that unless you were invested in Equity markets through the volatility, it is likely that you might have ended up with a lower or negative return as against the return you would have generated from debt markets during the same period.

With growing reach of debt mutual funds, the problem of high ticket sizes is being addressed as investors can now take exposure to debt markets with smaller investments in these mutual funds as well. Debt is best suited for those investors who look for stability in returns, and are saving for a future purpose such as buying a house, higher studies or retirement planning. Although you may generate higher returns in equity investing during the same periods, it is likely that the markets are negative at the time when your need arises and you wish to withdraw your funds.

There is a saying that “Markets can remain irrational longer than you may remain solvent”. Simply put, although your view on equity markets may be correct but no one can time the markets well enough to ensure positive returns all the time. Under such a scenario, investors must not ignore investing in debt markets to bring stability of returns to their portfolios.