Stocks and bonds are two investment class that has the power to make economy rise or fall anytime. Stock is the investment class that provides the best return in the market, while bonds have always been a strong performer and a defensive investment class. Bonds are highly recognized for performing in the global crisis, such as the current ‘COVID-19’ crisis. The bond market, which generally functions well in the worldwide crisis, did not in the current COVID-19 crisis. The corporate bond market, which plays a vital role in financing businesses, witnessed inevitable disruptions. It forced many companies to shut down new bond issues and cut employment.
But in the ongoing pandemic, the equity fell very hard and rose again to new levels. Generally, when the equity does not perform well, the investors start switching to the debt market. It is not just the case with the retail investors but even DIIs and FIIs switch to debt securities and pulls their investments from the equity market. The banks kept their Fixed Deposit (FD) rates close to 5.5 per cent. So, if you are living in an urban area, the FD rates will no longer protect you from the inflation rate. So, investing in FDs or other debt securities will be out of the option. The arrival of vaccines has undoubtedly boosted global growth at some level. However, the recovery remains fragile in the short term, and monetary policies and supportive fiscal remain essential.
The Central banks are not much focused on increasing interest rates, which means the yields are most likely to stay low for some time. Besides, the uncertainty around the third wave of coronavirus in India is a significant concern. Under these circumstances, the investment class you pick must limit the downside of the current crisis and provide an inflation-adjusted return. At such times, the stock can be the best investment class amid the present situation or post-crisis. Last year, the stock market returns followed the trend of the year 2019. But in the second half of 2021, the market started to recover from its drop of March. Once the rally began, the bull market jumped significantly. In 2021, the investors are expecting the same rally in the market and its absence, finding it difficult to make returns similar to last year. But that’s the beauty of equity returns. You do not need to align your financial goals with the current state of the market or economy.
An investor must be prudent when making an investment decision. Investing mainly in one asset class, regardless of stock or bond, can be a mistake. Instead, the investor should use diversification to expand the investment portfolio to the various asset class. Diversification is an efficient tool for your wealth management plans. The selective investments across debt instruments and stocks can help maintain a balance between interest-rate sensitive and highly volatile holdings, which can help reduce volatility and boost return potential as the global economy recovers.
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