Amid stock market volatility, should you look at bonds for safer returns?

Indian stock markets have remained volatile lately on the back of domestic and global news flow. The benchmark indices- BSE Sensex and NIfty50- have delivered negative returns in the last one year and are down nearly 6 per cent from their respective 52-week highs hit in September 2024.

At a time when the equity market is not boosting investors’ morale, should they look at the bond market,  despite falling interest rates. Market participants believe that one should look to park their money in long-term bonds in the falling market, while usually falling in such scenarios.

It is a good time to invest in bonds given equity volatility and given growth concerns it is likely that RBI cuts rates again which bodes very well for fixed income. Inflation takes a backseat for the moment, said Vishal Goenka, Co-Founder at IndiaBonds(dot)Com.

“Bonds add predictability when equities are choppy, because coupons and maturity values are defined upfront. Maturity should align to life goals so that coupons and redemption cash flows. If the plan is to hold the bond till maturity, day-to-day price moves matter far less,” he said.

Echoing the same tone, Tushar Sharma, Co-founder at Bondbay said that inflation has cooled to its lowest level in eight years, giving the RBI more flexibility. There’s also value in high-quality corporate bonds. The spread between 5- to 10‑year corporate yields and government securities ranges roughly between 75 to 85 basis points. This has led fund managers to tilt toward shorter-duration corporates, he said.

However, Sharma cautioned that it is not entirely risk-free. “The rupee is under pressure, slipping to an all-time low due to US tariffs and FPI outflows. That, paired with fiscal uncertainty and looming GST changes, could stoke volatility,” he warned and added that bonds offer both income and cushioning, making them a smart consideration right now in India.

The trade-off between short-term and long-term bonds needs careful assessment. Investors should note that longer-term bonds usually rise more in price, when interest rates are tumbling, but experts suggest that one should not put all eggs in one basket. They advocate a structured approach to build a fixed income portfolio to combine stability with upside potential.

Long-term bonds tend to benefit the most in a falling interest rate environment. Their higher duration makes them more sensitive to rate cuts, resulting in stronger price appreciation, explains Sharma. Short-term bonds provide stability and liquidity. Their limited sensitivity to rate changes means they are less volatile, making them suitable for conservative investors,” he adds.

“A barbell strategy is preferred with government and state guaranteed bonds at the long end coupled with high yield corporate bonds in 2–3 year maturity segments to enhance returns,” said Goenka, who advised investors to park their money in the fixed income market to achieve their goals.

Bonds are consistently drawing attention in the volatile market as they offer steady income and the prospect of positive real returns, but one should understand that no investment comes risk-free and so is the debt or bond market. This rate sensitive asset triggers wild moves on rate changes. Along with that, they come with credit default, liquidity, and reinvestment risks.

Interest rate risk is the most common—when rates rise, bond prices fall, especially in long-term bonds. Credit risk is about the issuer’s ability to pay. G-Secs carry sovereign safety, state-guaranteed bonds combine safety with better returns, and AAA-rated issuers add strength. A small, selective allocation to AA-rated bonds can improve income but should be managed carefully, said Goenka from IndiaBonds.

Besides the interest rates, another concern is fiscal and currency pressure. India’s large borrowing programme and the issuance of ultra-long bonds can weigh on demand and keep yields sticky. At the same time, the rupee’s weakness heightens the risk of imported inflation, which can undermine the current favourable bond environment, said Sharma from Bondbay.

On a whole, bonds provide stability and attractive returns for the investors but they should stay alert to rate shocks, fiscal imbalances, currency movements, and issuer quality. A cautious mix of sovereign and top-rated corporate bonds, with measured duration exposure, remains the most prudent approach, suggest experts.