Personal Finance - Its time to steer your debt portfolio towards safety

Be mindful of risk appetite and the holding period when reviewing your investments.

The month of August saw debt fund investors get a jolt with many categories that had been posting double-digit returns suddenly entering the negative territory. The lower-than-expected GDP numbers and GST collections with persistent high inflation indicates upward pressure on yields.

The immediate action by the Reserve Bank of India (RBI) to contain the spike in yields in August, besides its efforts to maintain adequate liquidity, signals that yields may not move up significantly despite the pressure. However, the period of easy gains in debt markets may also be over. Is this situation a cue for investors to relook at their debt fund portfolios?

“While the sluggish economy and higher inflation numbers are matters of concern, the signalling actions of RBI on managing yields and liquidity in the banking system, combined with global interest rates being close to zero or negative, will have a positive impact on bond yields," said Lakshmi Iyer, head, fixed income, Kotak Mahindra Asset Management Ltd.

Strengthen your core

The core portfolio is meant for asset allocation needs and must reflect the needs of long-term goals. Keep your needs and investment period in mind while choosing funds.

Choice of funds: Corporate bond, banking and PSU and short-duration categories are best suited for the core portfolio. Categories like medium-duration may also be suitable for investors willing to take on greater risks of interim volatility.

“Corporate bond funds with AAA and good quality AA portfolios with medium duration of three-four years can be considered even in this kind of market scenario," said Renu Maheshwari, CEO, Finscholarz Wealth Managers LLP.

Choice of strategy: Investors who like predictability of returns may consider funds that follow a roll-down strategy that helps lock in the yield at the time of investing, but comes with a prescribed holding period. However, the strategy does not shield the portfolio from interim volatility. The Bharat Bond ETF series and open-ended debt funds that follow the strategy but invest in opportunities beyond PSU bonds are options to consider.

Also, the strategy excludes the investor from benefiting from interim yield softening. That may be seen as a drawback considering that the interest rate journey going forward won’t be unidirectional.

“Investors should expect some volatility, but for three-four years holding period, short-term volatility should not matter," said Deepali Sen, partner, Srujan Financial Advisors LLP. Funds that follow dynamic investment strategy—repositioning the portfolio to reflect the interest rate view—can also help protect debt portfolios in a rising interest rate scenario. “Dynamic funds today are the best bet. They offer participation across duration and corporate bonds. They make agile movements to benefit investors," said Iyer.

“This strategy is a little opaque and investors have to take a chance with the fund manager’s ability to make the right calls on rate direction," said Sen, explaining why she does not favour this strategy.

Stay high on liquidity

For the portion of the portfolio where liquidity and capital protection is a priority, it is best to stay with overnight and liquid funds.

“All my clients’ funds required for immediate needs, including the emergency fund, are now held in liquid funds. Even money that was earlier held in categories like ultra-short," said Sen. Investors who were able to earn better returns on their short-term money in the rate reduction phase in categories that maintain slightly higher duration like money market, low-duration and even ultra-short should consider being conservative. In a rising yield scenario, these categories may see brief periods of negative returns.

For investors looking for tactical gains, there may not be as many low-hanging opportunities going forward as there were last year. A spike in yields will give opportunities to lock into higher yields.

“The bond story is not over yet. There will be pockets that will do well and that is true for all asset classes, and fixed income is no exception," said Iyer.

Gilt funds that were at the forefront of short-term returns may not be able to give a repeat performance. But those who remain invested for at least five years will see a reasonable return but with heightened interim volatility. “We had moved money into gilts as a tactical call in March this year. Our investors made good returns and we have, for the most part, exited this call now," said Maheswari.

Source : Live Mint back

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