Active Stocks
Fri Apr 19 2024 15:56:00
  1. Tata Steel share price
  2. 162.10 1.31%
  1. Tata Motors share price
  2. 963.20 -0.84%
  1. NTPC share price
  2. 350.90 -0.14%
  1. ITC share price
  2. 424.80 1.40%
  1. Power Grid Corporation Of India share price
  2. 281.70 0.54%
Business News/ Money / Personal Finance/  Aligning your fixed income strategy to the new realities
BackBack

Aligning your fixed income strategy to the new realities

Use shorter-term deposits to be able to get the benefit of being able to reinvest

MintPremium
Mint

The last few weeks have seen multiple events taking place which could have a material impact on your fixed-income strategy going forward, ranging from the Union budget proposals and the Monetary Policy Committee (MPC) meeting of the Central bank in India to US inflation concerns.

Collectively, these events have impacted bond markets in India, and are likely to continue to have an impact for some time. The immediate impact of the Union Budget was a sharp increase in yields, with the 10-year government security moving from 6.68% to 6.90%, which effectively meant that the capital values and NAVs of bonds and debt mutual funds were negatively impacted, due to the inverse movement in bond yields and bond prices. This was largely driven by the anticipated government borrowing programme of nearly 15 trillion gross, even though the fiscal deficit numbers were broadly in line with estimates at 6.4% of GDP.

The Reserve Bank of India (RBI) stepped in by cancelling multiple auctions in the post-budget announcement to calm nerves in bond markets, though it may only be a temporary solution. As an additional relief to bond markets, RBI also left interest rates unchanged post the MPC and continued with its accommodative stance. This was largely driven by it belief that inflation going forward will be significantly lower than what the market estimates are, and as is evident from the table, the MPC estimates were certainly trending downwards and, therefore, soothing.

Mint 
View Full Image
Mint 

With oil prices are also significantly higher than what was earlier anticipated on the back of recovering global demand and supply disruptions from the geo-political events, it does seem like there could be material risks to inflation being higher than what is currently being anticipated. Thus, watch oil price movements carefully and the resultant current account deficit, which could impact he rupee and interest rates.

Fixed income strategies will, therefore, need to be built on the back of these potential risks that may impact investments in fixed income securities. It may, therefore, be ideal to construct portfolios keeping in mind the following:

- Allocate a portion of your investments to liquid and ultra-short funds, so that the interest rate sensitivity of the portfolio is kept low and there is no material impact on your funds when interest rates head upwards.

- In case you are using bank deposits /high-quality corporate deposits, use shorter-term deposits to be able to get the benefit of being able to reinvest at higher rates, going forward.

- Allocate a portion of your investments to target-date maturity funds, to get the benefit of being able to ladder your portfolio across different maturities, and reduce the concerns of mark-to-market risks since you will be following a ‘hold to maturity’ strategy in most cases. The additional advantage of these funds is the low costs and passive strategy, avoiding fund manager security selection risks to a great extent.

- Avoid chasing yields through higher credit risk instruments, though the credit environment has become better than what it was. However, the illiquidity of the corporate bond market in India means that this risk continues to exist, in the case of securities where there is bad news/fear of a downgrade or default that comes up.

- Stay focussed on your asset allocation and avoid moving monies from fixed income to equity, just because of uncertainty in fixed income markets. The downside volatility in equities tends to be much higher, and thus allocating monies that may be required in the next 2-3 years to equities, is always a high-risk strategy.

- Most of your fixed-income allocations need to continue to be in short-term funds with good credit quality if you are a medium-term fixed income investor, and do not have short-term liquidity needs.

Rate hike cycles this time could be much shorter and the interest rate peaks may be lower than previous peaks. Thus, making significant changes in the fixed income strategy on the back of current data may not be a good idea.

Vishal Dhawan is a certified financial planner, and the founder and CEO of Plan Ahead Wealth Advisors.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 03 Mar 2022, 11:25 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App