Bring some stability to fixed income portfolios
The stability of an NRI’s portfolio is ensured to a large extent by the coupon or interest rate of fixed income instruments at periodic intervals such as quarterly or semester and sometimes annually. This coupon or interest is a pre-fixed rate, set when the instrument is issued. The exceptions to this rule are variable rate instruments and zero coupon bonds. In floating rate instruments, the coupon varies from time to time according to changes in market rates, while in zero coupon bonds there is no coupon, but the bond is issued at a discount. compared to the nominal value. The difference between the issue price and the face value, or the haircut, is actually what one will do over time.
Movements in fixed income markets are closely linked to movements in interest rates. High inflation, low liquidity, high level of credit growth, government borrowing program, etc. exert upward pressure on interest rates. In other words, interest rates generally tend to rise with higher inflation which is usually the result of a high economic growth rate. The reverse happens when there is apathy or recession in the economy. Therefore, it is a market which evolves according to interest rate expectations and which has a science and a method.
All fixed income investors, especially NRIs, should keep in mind that, like other investments, fixed income investments involve both interest rate or price risk and currency risk. credit. When interest rates rise, the value of the portfolio decreases and when interest rates fall, the value of the portfolio increases. This variation in the real value of the portfolio as a function of interest is called interest rate risk. The interest rate risk is linked to the maturity profile of the instrument. The longer the maturity, the higher the risk and vice versa. Therefore, when interest rates rise, it is advisable to stick to short-dated papers or bonds, as the loss resulting from adverse interest rate movements is quite low in short-dated instruments. .
Another risk associated with fixed income investments is credit risk. This is a risk linked to the issuer of the instrument. Is the bond issuer, who has borrowed money through the instrument, able to pay periodic interest or coupons, and return the principal on the due date? This relates to the credit rating of the instruments, where the highest security is indicated by AAA then AA and followed by A, and so on. AAA indicates the highest level of security. Although instrument ratings are available from credit rating agencies specializing in rating work, it may not be up to the layman to decide on the credit comfort of an issuer or instrument. It is the domain of trained professionals. Banks and financial institutions, mutual funds, etc. have their credit assessment teams and they have a regular flow of credit profile information. Never get carried away by the high yield on a bond or paper with a low credit rating.
As previously stated, the fixed income component of the portfolio provides stability to the portfolio. Indeed, whatever the market conditions, the coupon or the interest of these instruments are received at periodic intervals such as quarterly, semi-annually or annually. These entries ensure that one receives something from the investments. This is not the case with real estate, gold or stocks.
Yet another feature of fixed income is that the level of volatility is also relatively lower as interest rates move in a very scientific, and very studied, way linked to economic fundamentals. This reduces the scope of movements based on sentiment, emotions and rumors that can be seen in other segments of the market, such as currencies or stocks. It is also a favorable factor that these instruments are relatively easy to liquidate and realize value in an emergency.
It is possible to buy and hold individual instruments like bonds and securities issued by various companies. Although it has its own advantages, a better idea would be to look at good mutual fund debt plans. Mutual funds have portfolios that contain a number of instruments issued by different issuers. The advantage of such diversified portfolios is that one significantly reduces the level of credit risk by holding smaller amounts of multiple papers in the portfolio. In the case of an individual buying a bond, a credit assessment must be performed by the investor himself. But in the case of investments in a mutual fund, the same is already done by a team of trained professionals when selecting instruments.
For NRIs, fixed income securities offer several possibilities for short-term parking of excess funds, not only treasury bills and commercial papers, but also overnight funds and liquid funds, etc. For longer term investments, there are programs like corporate bond funds, gold funds, short term funds, bank debt funds and PSUs etc. in the mutual fund space. It is also a good avenue for NRIs who are planning for retirement and want to receive regular and stable cash flow from time to time. A well-planned and timely investment in the right type of fund, debt mutual funds can provide significant value to portfolios for long-term growth.
“The opinions and investment advice expressed by the expert are his own and for informational purposes only. Any advice shared by the expert should be verified with the independent financial advisor before making any investment decision.”