Align your fixed income strategy with new realities

Over the past few weeks, many events have occurred that could have a significant impact on your fixed income strategy going forward, ranging from the Union’s budget proposals and the meeting of the Monetary Policy Committee (MPC ) from the central bank in India to inflation concerns in the United States. .

Collectively, these events have impacted bond markets in India and are expected to continue to impact for some time. The immediate impact of the Union budget has been a sharp increase in yields, with 10-year government security rising from 6.68% to 6.90%, which effectively means that the capital values ​​and net asset values ​​of bonds and mutual funds were negatively affected, due to the inverse movement of bond yields and bond prices. This was largely due to the planned public borrowing program of almost $15 trillion gross, although fiscal deficit figures were broadly in line with estimates at 6.4% of GDP.

The Reserve Bank of India (RBI) stepped in by canceling several auctions in the post-budget announcement to calm nerves in bond markets, although this was only a temporary fix. To further relieve bond markets, RBI also left interest rates unchanged after the MPC and continued its dovish policy. This was largely driven by the belief that inflation going forward will be significantly lower than what the market estimates are, and as the chart shows, the MPC estimates were certainly on the downside and, therefore, soothing .

Show full picture

mint

With oil prices also significantly higher than previously anticipated due to the resumption of global demand and supply disruptions from geopolitical events, it appears that there could be significant risks that the inflation is higher than currently expected. Thus, watch oil price movements and the resulting current account deficit carefully, which could impact the rupee and interest rates.

Fixed income strategies will therefore need to take advantage of these potential risks which may affect investments in fixed income securities. It may therefore be ideal to build portfolios with the following in mind:

– Allocate part of your investments to liquid and ultra-short funds, so that the portfolio’s sensitivity to interest rates remains low and that there is no significant impact on your funds when rates rise. interest go up.

– If you are using high quality bank/corporate deposits, use shorter term deposits so you can benefit from the ability to reinvest at higher rates in the future.

– Allocate a portion of your investments to target-date maturity funds, to benefit from the ability to spread your portfolio over different maturities and reduce market valuation risk concerns, as you will follow a ‘hold-till’ at the due date “. ‘ strategy in most cases. The added advantage of these funds is the low cost and passive strategy, largely avoiding the risks of fund manager stock picking.

– Avoid chasing yields through higher credit risk instruments, although the credit environment has become better than 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 occurring.

– Stay focused on your asset allocation and avoid shifting funds from fixed income to equities, simply due to uncertainty in fixed income markets. The downside volatility of equities tends to be much higher, and therefore allocating funds that may be needed over the next 2-3 years to equities is always a high risk strategy.

– Most of your fixed income allocations should continue to be short term funds with good credit quality if you are a medium term fixed income investor and have no cash needs short term.

Rate hike cycles could be much shorter this time and interest rate peaks could be lower than previous peaks. Thus, making significant changes to the bond strategy based on 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.

To subscribe to Mint Bulletins

* Enter a valid email address

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our app now!!

Comments are closed.