Fixed income is a timeless investment. As an asset class, it always provides a layer of security and stability for an investor. In the last few years, fixed income has lost wallet share with investors because equity markets have delivered stellar stable returns. Moreover, tax changes made it less lucrative to own debt mutual funds and Market Linked Debentures (MLDs). With the return of market volatility, fixed income could be experiencing a renewed lease of life.
Market Volatility
Compared to 2024, the first month of 2025 has already seen volatility spike. In 2024, the average VIX reading was just shy of 15. Within one month this has risen to 16. Investor sentiment around India is changing. FIIs are paying attention to the US Dollar, Trump’s policies, US Market Yields, and Emerging Market Valuations. Given that the US is heading into a shorter rate cut cycle and a stronger economic environment, money is flowing back into dollar based assets.
This volatility is here to stay. FIIs were net sellers almost every single day in January. Markets are disappointed with the projections, revenue growth, and margin expansion that’s coming out of Q3 result announcements. This is pulling investors back to the drawing board on their valuation assumptions and return expectations. Re-ratings or DII selling may be two forces that could push market volatility up.
Performance Is Asset Class Agnostic
The last few years have challenged the notion that equity is the only long term wealth creator for investors. Clearly, the last decade belonged to equity. But in recent times precious metals have given equities a run for their money. There is always a need to move money from performing asset classes to asset classes that will become performers. Chasing performance weighs on compounding instead of enhancing it. As markets turn more volatile, even fixed income could be an outlier delivering positive returns in a challenging market environment.
Yields: Not A Simlpe Story
Investors normally expect yields to change based on the movement of interest rates. In this cycle, there’s a lot more than just rates which could drive yields. For starters, tight liquidity conditions have kept yields in check even after the RBI’s rate cut announcement. Many other macro factors could push and pull yields. A few things to consider are the dollar, trade deficits, government spending, and inflation.