Today, investors know what a rough market looks like, and it’s only the tip of the iceberg. Since September, investors have experienced drawdowns, volatility, and a recalibration in equity markets. As narratives shift, investors are turning their attention to a silent and potent asset class: fixed income. Which brings us to an important question: how big is the opportunity in fixed income?
True Risk Appetites
Did you know that nearly half of today’s mutual fund investors entered the market in the last four years? Markets have seen an upward trajectory for most of the last four years, encouraging investors to set unrealistic expectations and misjudge their risk appetites. When markets correct rapidly, investors begin questioning performance, their product choices, and their fund manager’s decisions.
It’s only in a down market that an investor comes to terms with how much risk they can afford to take. This discovery isn’t based on expectations, but actual drawdowns. New investors often find that they’d prefer to tone down risk levels in their portfolios. Veteran and ambitious investors recognise that there is an opportunity to capture. Fixed income is excellent at lowering portfolio risk and maintaining investor confidence.
Opportunity Knocks Twice
Usually, yields peak at the top of an interest rate cycle. But this cycle has been unique for a variety of reasons. First, the yield curve has been more or less flat in the post-COVID era. Meaning there was no extra return available for taking on duration risk. Next, interest rates are in the sweet spot between sustainable growth and moderate inflation. Last, liquidity is dictating yields even after the interest rate cut.
So, investors who missed getting on to the debt bus in the last year now have an option to enter at attractive levels. It’s not about the rate cut cycle as much as the liquidity cycle.
Think Long Term
From a long term perspective, Indian sovereign debt is getting more attractive. The government’s track record on execution its fiscal consolidation plan is commendable. India’s trade policies, forex management, growth prospects, and inflation targeting mandate have all contributed to a healthier macro environment. The change in macros could well warrant a rerating for Indian government debt. Moreover, with Russia and China’s weights on global bond indices reducing, the appetite for Indian sovereign bonds has grown.
Seek Safety Not Returns
Recent market trends show that many investors burnt their fingers chasing equity returns. History shows us that chasing returns in debt is far more dangerous. When equities turn nonperformers, it’s tempting to maximize debt returns. However, there’s no compensation for a bad debt investment. Fixed income returns are capped and losses extend to the full principal. So, an investor must focus on maximizing safety and accepting returns whatever they may be.
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