Amid market fall, should investors raise exposure to fixed income instruments?

Benchmark indices Nifty50 and S&P Sensex ended two percent lower this week. The continuous fall of the broader indices during the ongoing Lok Sabha polls 2024 has triggered investors to relook at their portfolio, particularly their allocation to debt instruments such as fixed deposits, government bonds, corporate debentures, debt mutual funds and other fixed income instruments such as NPS, PPF and post office schemes. 

Investing in fixed income instruments provides stability to the portfolio and helps them sail through volatility with ease. Wealth advisors suggest that this is the time to exercise caution and investors should stick to long-term allocation.

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“Valuations of Indian equities are not cheap and hence investors should exercise caution. Hence, investors should maintain an allocation which is closer to their long-term equity allocation. This could mean that investors could relook at their exposure to debt investments. Debt investments offer attractive yields and with expectation of rate cuts in coming few months, investor returns in debt investments over the next 2-3 years could be higher than recent past,” says Alekh Yadav, Head of Investment Products, Sanctum Wealth.

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Vishal Goenka, Co-Founder of IndiaBonds.com, opines that fixed income instruments play a key role in providing stability and predictability to portfolio, characteristics that are highly valued during such periods of volatility.

“Fixed income instruments are crucial components of a diversified investment portfolio.  Bonds, a primary category of fixed income instruments, offer regular income through interest payments and are less volatile than equities,” he says.

Debt allocation 

The decline in benchmark indices is also seen as a good time to raise allocation to equity and cut down on debt portion at the same time.

Sridharan Sundaram, a Sebi-registered investment advisor and Founder of Wealth Ladder Direct, says, “Asset allocation depends on the goals and time they have. The short-term volatility gives investors an opportunity to rebalance their portfolio. When the market is down, debt allocation in the portfolio will naturally increase. Let us suppose you have 70 percent of your portfolio in equity and 30 percent in debt. Because of the market fall, this ratio may become 65-35 . Thereafter, you can do some rebalancing and invest more in the equity in a staggered manner. This will help you sail through the volatility.” 

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However, Ravi Saraogi, Co-founder of Samasthiti Advisors, believes that if initial allocation is correct, you would not need to opt for rebalancing. 

“If rebalancing needs to be done because of market fall, it means the initial allocation was wrong. On the other hand, when an investor's financial goal is quite far in the future, say 10 years later — then s/he should buy more equity in case of correction. You should not be selling equity when the market falls,” explains Saraogi.