What is Bond Portfolio Management?

BOND PORTFOLIO MANAGEMENT : The individual investors can invest in bond
portfolio. The portfolio can be spread over variety of securities. Investment in Bonds is less
risky and safe as compared to equity investment. However, the return on bond is very low.
There is no much fluctuations in bond prices. Therefore, there is no capital appreciation.
Some bonds are tax saving which help the investor to reduce his tax liability. There is no
much liquidity in Bonds. Thus, investment in Bond portfolio is less risky and safe, but
return is reasonable, low liquidity and tax saving are some of the important features of
Bond portfolio investment. However, normal investors can use this portfolio for getting
average return over their investment.
The risk associated with a security depends on when investment is to be liquidated. An
investor who plans to sell in one year will find equity returns to be more risky than a person
who plans to sell in 10 years. On the other hand, the person who plans to sell in 10 years will
find one year maturity bonds to be more risky than the person who plans to sell in one year.
Thus, the risk is reduced by selecting securities with a pay off close to when the portfolio is
to be liquidated.
Bond portfolio includes different types of bonds, tax free bonds and taxable bonds. Tax
free bonds are issued by Public Sector undertaking or Government on which interest is
compounded half yearly and payable accordingly. They have a maturity of 7 to 10 years
with the facility for buyback. The tax free bonds means the interest income on these bonds
is not taxable. Therefore, the interest rates on these bonds are very low. However, taxable
bonds yield higher interest compounded half yearly and also payable half yearly. They also
have buy back facilities similar to taxable bonds.
The basic purpose of portfolio management is to maximize yield and minimize risk. Bond
portfolio will help to minimize risk but it cannot help to maximize the returns. In order to
maximize returns, the investor has to use equity portfolio_ Every investor is risk averse. All
investments have some risk which arise out of variability of returns and uncertainty of
appreciation or depreciation or loss of liquidity. Normally, the higher the risk that the
investor takes, the higher is the return. However, there is a riskless return on capital about
7 to 8% which is the bank rate charged by the RBI on long term yield on Government
Securities. This riskless returns refer to lack of variability of return and no uncertainty in the
repayment of capital. Investment in Bond portfolio is also sometimes, riskless. However,
the return is also low.