Thirteen years ago, when I graduated and started working, my dad had couple of suggestions. Papa ne kaha, “dekho beta, you have graduated and will be earning on your own”, he continued, “you have to develop your own thinking and your own future. We have mentored you enough, now you are on your own”. [At that point in time, I did not realize what he meant by this. Anyways] He also said, “meri sirf do baat yaad rakhna”. And following are those two words.
- You will earn a lot of money in your life. You will not be alone. Everybody does it. The important thing for you would be to figure how to keep it. Samajh rahe ho. Keep it, and not let it go waste.
- Never forget my generation’s government bonds. They are wealth builder.
As it always happens, I have never made an effort to follow my dad’s advice. But now when I look back, I realize that sub-consciously, I have followed both of his recommendations.
In today’s investment environment, while corporate bonds still have some luster, the government bonds have been left behind in popularity. And the reason I say this is because, whoever I talk to, almost everybody looks down at government bonds. Most of the time, the argument is that it only gives 8% to 9% interest which is barely equal to inflation. These returns from bonds tend to become misnomer in comparison to returns from other investment products (e.g. mutual funds, ULIPS, equities, NCDs, etc.). While I agree that it does not provide any real return, we new age investors fail to put that into proper context. Here, again, I believe we fail to properly understand the role of government bonds into our portfolios. In my view, a well thought out risk based investment roadmap, will always have a role for bonds in our portfolios.
I mostly use National Savings Certificate (NSC). I also have couple of ten year maturing Bhavishya Nirman Bonds from NABARDS. I have not yet tried my hand at corporate bonds.
How do I use government bonds NSC?
I started my investing experiments thirteen years ago. For two years, I was in complete wilderness trying to figure out what to do and how to do. After those two years, when I started to think about constructing a long term portfolio, I realized, it is important to have a solid foundation. During those days, I read a lot about asset allocation, diversification, risk management, etc. At a fundamental level all these concepts are oriented towards – a good solid foundation.
It took me five years to build this solid foundation. The first step in this foundation building process was no more equities and no fancy investment products. In other words, I completely ignored them. I slowly built a portfolio of NSC bonds. I built laddered NSCs that, after wait of first six years, now mature every year. I do not need this invested money at this point in my life. So all I do is, keep reinvesting them every year after they mature. All of these bonds have matured at least once since they were first bought.
To begin with, I had 90% of my portfolio in NSC bonds. I stopped future allocation to bonds after I was satisfied with the level of allocation. As for today, I think that NSC bond consists of about 19% of my overall portfolio. Sometime in middle, I also bought NABARDS bonds, but their value is, probably, little less than 1% of overall portfolio.
Yes, during those days, it did feel that I am missing the bus or I already missed the bus. I vividly remember many folks giving me advice that I should go for mutual funds or stocks. NSC is for old generation. It was really hard to keep myself grounded and remain focused. Admittedly, the biggest fear I had was, my NSC bonds are not growing at 30%+ like these folks keep talking about. Well, I stuck it out and did not get carried away in stock market euphoria.
Government bonds provide stability, keep my capital safe, keep up with WPI inflation, and provide solid foundation to my portfolio. A well constructed bond’s portfolio (or bond allocation) will provide a confidence, or spring board for taking long term equity risks. During downturns or when buying depressed shares, I do not get worried of losing my capital. What happens is; when an individual does not have a backup (or solid foundation), he/she tends to become conservative and misses the opportunities in downturns.
It is my belief that a portfolio without good allocation to bonds looks like the image above. One collapse and your portfolio will crash. And the scars left behind will take time to heal. Bond allocation gives me a sense of security when making equity decisions. I know even if my equities went for a toss (or crashed) I have enough backup to sustain myself for few years with this loss. It allows me to sleep well at night.
Now I know, what my dad meant by, “learn how to keep it”. Those words still resonates in my ears. Thanks Dad.
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