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Your goal should determine which debt product to pick

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THE turmoil in the debt market has meant that the investor needs to be very clear about the manner of debt instruments that they are including into their portfolio. There is a need for the investor to make a clear distinction in the nature of the debt instrument so that they are able to handle the risks that come with the investments in a better manner. Here is a look at what they need to do and how they will be able to handle this in an effective manner.

Traded or not:

The first task before an investor is to look at the nature of the debt instrument or investment. This means that they have to see whether this is actually traded or not. The nature of it being traded can ensure that there is an added element of risk of a capital gain or loss that can arise.

A simple example of an instrument that is not traded is fixed deposit. All that the investor has to do with respect to this investment is to go and invest the money in the deposit and then at the time of maturity ensure that the amount is retrieved. On the other hand, when the instrument is like a bond that is actually traded in the debt market, then there is the need to track this to see the kind of impact that market conditions are having on the price of the instrument and whether the investor should make use of the opportunities available to them.

Nature of holding:

The nature of the holding is also important from the point of view of tackling the volatility that one might witness in the debt market. For example, if the aim of the investor is very clear, which is that they will invest in the fixed income instrument and then hold it to maturity, then this would not give rise to any more problems in the interim as the individual would just ensure that they keep the investment to the side and get up only when the time for maturity nears. On the other hand, when the opposite is true and there is a plan to trade in the securities for the period when they are held, then this would have to be tackled differently.

Returns:

There are two ways in which returns can be earned on a fixed income instrument. The first one is simple to know in the sense that this is the interest that the instrument pays. The second one, which would arise usually only in case of traded instruments, is that of capital gains, and hence this needs to be understood properly.

The presence of interest rate risk can ensure that the overall return in the investment turns out to be negative, which is something that every investor would want to avoid and hence this has to be taken into consideration.

Specific goals:

Every investment has to be geared towards some specific goals and it is important that this is also matched with the nature of the instrument.

There are some goals that have to be achieved no matter what the overall situation is. These are ones that are important from the overall point of view in life.

These goals have to be achieved using instruments that cannot lose value, so it is important to ensure that fixed deposits or bonds that are not traded are used for this purpose. There are other goals that need stability and these require the presence of debt instruments for their achievement. An example is that of building a retirement corpus, where the individual needs some debt investments to provide an element of stability.

This will require use of debt funds and other instruments that can result in a higher rate though there can be periods when there is some turmoil in these investments.

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