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Market timing has been a debatable subject in the world of finance. While most of the experts argue that investors should not time the market, the scope of the coverage of market timing remains confined to the equity and equity related instruments. While timing equity market is indeed challenging task and can often not produce desired results, isn't it possible to time the market in other products such as debt instruments Can an investor time the market in debt products? Is it possible to make money by timing the market? The idea behind asking all these questions is to spot the right opportunity available in the market for investments in debt products.
But before moving ahead let us understand that timing market in debt products has some constraints. Secondary market is very shallow for debt products but primary market is extremely active. Even during last few years of recession when the IPO market in equity was down, there was flooding of offers in debt market. So there were tax free bonds, NCDs of companies and other debt instruments available for investments. Giving this, how can an investor benefit from timing of debt market and what should he do? Let us look at how debt market can provide better opportunities in terms of timing.
Debt market is relatively much more stable than equity market: The return or yield in the debt market shows movements which are much more stable than equity market. Unlike steep fall in the equity market overnight, debt market shows limited movement during a day or week. Such fall does not impact investors much. For instance, in the current scenario in India, the rate of interest and the corresponding yield shows movement significantly only when some critical policy measures are announced by the central bank or the government. This is something known in advance in many cases as the calendar of events are known. Because of stability, the movement in the debt market can be easily predicted. Since debt market does not have depth and transaction costs are high, timing debt market won't be easy.
Debt market replicates history more frequently: Debt market shows more consistent trend which reflects past. This means it is easy to identify whether rate of interest has peaked or not. This is turn makes prediction relatively easy. If the rate of interest goes up beyond a point, it is easy to lock your investment in debt product at that level.
In view of above two characteristics of debt market, it becomes important that investor should look at some key indicators of timing debt market so that wealth maximization can be done by selecting right investments. Market timing can happen primarily in primary market only.
At the current juncture, the rate of interest in India is a very high level. There are many debt products being issued at a very high rate of interest. It will make sense for investors to lock in some money in these high yield debts for a long term as the rate of interest is likely to fall in the time to come, if not in the immediate near term. Those who had missed investments in tax free bonds can still buy these bonds from secondary market and add to their portfolio. The bonds are available for buying on National Stock Exchange (NSE). There are investment options which are available at a rate of 8 plus percent as tax free for a fairly long period of time which goes as long as 20 years.
Apart from the current opportunities available, it is also important that investors should stop high yield quality debt products from time to time invest in them. Every matured economy in the world has low rate of interest as inflation has been controlled in these countries. As India becomes developed, getting a rate of 8 plus percentage tax free returns may not be easy. So it makes to lock money in these high yield debt instruments. It is possible that after 5 to 7 years, debt may help you to beat inflation and you need not run after equity for that
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