Question

Your sister and brother in law are interested in the bond market as a shelter from the volatility of the equity markets. What would you say to them? Are there any specific funds that you would suggest they investigate? Your mom and dad will be retiring in 5 years or so and feel that they shouldn’t be totally invested in the stock market. They ask you for advice on how to start transitioning to less risky investments, such as Treasurys and blue-chip corporate bonds. What would you tell them? Are there any funds out there you can suggest for them to consider? Be specific

Answer 1

1) Bond market offers relatively safer returns owing to the less volatility but a relatively lesser returns in the longer term. A sound portfolio practice is always to consider the risk profile of the investor and to have the right mix of debt and equity according to the appetite of the investor. Considering this, I would advise them to do have a portion of their portfolio in the bond market. Since they would probably have a larger risk appetite than a person retiring in some year, it would be advisable for them to invest in highly rated corporate bonds. This is because a corporate bond has a higher risk than a treasury or government bond, but the yield that is offered is higher and in the longer duration the higher yield effectively compensates for the risk factor associated with the corporate bonds.For. eg they can consider investing in High yield bond funds, and ETF's

2) Since mom and dad will be retiring in 5 years, it would be advisable for them to have a major portion of their portfolio in the bond market and a lesser proportion to the stock market. The transition would start investing in low-risk T-bills and government and municipal bonds. Since these bonds have very negligible risk, they also provide very low returns. Hence, a small portion of the bond portfolio must be invested in blue-chip and AAA-rated corporate bonds. The best way to do this is to invest in debt mutual funds since they are actively managed by highly skilled fund managers. For eg. they must invest in U.S. Treasury bonds ETF which is a passively managed fund, and because of this the management fees associated with these is very less.