Realising that I don’t like bonds all that much

I have been thinking about debt/bond investment since April 2023, right after the Government of India decided to tax gains on debt mutual funds at the slab rate. I have been looking at “debt-like” investments that are taxed less, but I am not fully convinced by any one solution.

A few days ago, I wrote to my financial advisor asking for advice. Here is a copy-paste of what I wrote to him:

Maybe I am overreacting to the recent taxation change. But I have been finding it hard to invest in mutual funds that only hold bonds. Here are the alternative options I have been thinking about:

1. Possibly the simplest: choose a fund like Edelweiss Multi Asset fund for debt allocation. This fund holds 50% arbitrage and 50% bonds. The bond portfolio looks high quality (AAA and SOV only) with about 2 to 3 years duration.
2. Instead of investing in Indian equity and bonds separately, invest in the Quantum Multi Asset Allocation fund. This fund holds 40% (actively chosen) Indian equity; 10 to 15% gold; and the rest in bonds. The reason I like this fund more than option #1 is that (a) this fund maintains a longer duration bond portfolio, (b) gives me gold exposure, and (c) this can simplify my portfolio by removing a separate fund for Indian equity. The caveats are (a) I don’t know if I’ll be happy to live with a smaller, active equity portfolio for Indian equity and (b) rebalancing between asset classes will be more difficult.
3. A fund that invests in up to 65% bonds and 30 to 35% gold (and maybe silver) will be a good replacement for the debt fund in my portfolio. But such a fund does not exist in India. Is there any such overseas ETF?

Maybe I am overthinking this and impatient for a solution to appear too quickly? What is your advice for me? :)

Writing this out gave me some clarity. Fairly soon after I wrote this email, I understood one thing: I invest in debt mutual funds without conviction. I understand equity, and I know why I have equity in my portfolio. But I invest in debt because I was told that a good portfolio should hold bonds along with equity.

Back when tax rules changed in 2023, tax for global equity—that is, non-Indian equity—also went up significantly. My advisor recommended that I avoid making fresh investments in global equity. But I stood firm and continued to invest in global equity. (Now the tax rules have changed again, and global equity is taxed more favourably.)

I chose to stick with global equity despite high taxes because I knew what I was getting from global equity. Can I say the same thing about bonds? Probably not. It appears that I only understand things like “reduced volatility” and “negative correlation with equity” superficially, and deep down I don’t like any asset other than equity. (I also like gold despite my decision to not invest in gold. I still haven’t added gold back to my portfolio, but my desire for gold hasn’t disappeared.)

I suppose I need to answer some basic questions about what I do and don’t like. I think I don’t even know what the correct mix of growth and stability for my portfolio is. More learning and introspection can only lead me to a solution—a portfolio that I am comfortable holding despite taxation changes that keep happening.