CM Fixed income actively manages duration and credit risk to navigate interest rate cycles, aiming for stability and risk-adjusted returns. It’s ideal for medium-term goals, balancing safety, liquidity, and minimal rebalancing.
Strategy Overview
Portfolio Rationale
This fixed income strategy is built on the foundational principle that asset allocation, not security selection is the dominant driver of long-term investment success. Debt plays a critical role in any portfolio, offering stability and downside protection during volatile equity market cycles. Rather than relying on rigid age-based rules, this approach tailors debt-equity allocation to individual risk tolerance, recognizing that even a young investor may need a higher debt allocation if market declines cause significant stress.
The strategy aims to navigate the interest rate cycle effectively. When interest rates are expected to rise, the portfolio shifts towards shorter-duration bond funds to limit interest rate risk. Conversely, in a falling rate environment, it pivots to longer-duration debt instruments to lock in higher yields. Credit risk is also actively managed, favoring safer government or PSU bonds during times of economic uncertainty, and selectively moving into higher-yielding corporate bonds when conditions improve.
While this approach may not be optimal from a tax perspective due to potential short-term capital gains, the focus remains on risk-adjusted returns and portfolio stability. Rebalancing is infrequent typically once in two years but can occur more often if market conditions warrant it. Designed for both lump sum and systematic allocation, this strategy serves as a thoughtful way to park capital for medium-term goals, balancing safety, liquidity, and returns.
Portfolio Methodology
Defining the Universe
This strategy focuses on high-quality debt instruments, specifically GILT funds. These funds invest primarily in government securities, offering a safe haven during volatile equity market cycles. The portfolio is constructed to serve medium-term financial goals with emphasis on capital preservation and stability.
Constituent Screening
The portfolio exclusively comprises GILT funds (index-based debt ETFs or mutual funds). Selection is based on interest rate outlook, duration sensitivity, and credit quality. The strategy dynamically allocates across short- or long-duration GILT instruments depending on the phase of the interest rate cycle.
Weighting
Weights are assigned based on macroeconomic assessment—particularly interest rate expectations and prevailing yield curves. Emphasis is placed on minimizing risk while capturing reasonable yield, without excessive churn.
Rebalance
This is an ad-hoc rebalanced portfolio, typically reviewed once every two years. However, adjustments can be made earlier if there are significant shifts in interest rates or macroeconomic risks.
Research
This fixed income strategy is anchored in a macro-driven asset allocation approach. By actively tracking the interest rate cycle, inflation data, and credit market risks, the strategy seeks to reduce downside volatility and provide more stable, risk-adjusted returns. Asset allocation, not security selection, is the core alpha driver.
Definitions and Disclosures
CAGR
CAGR (compounded annual growth rate) is a useful measure of the growth or performance of a portfolio. Every year, returns generated by a portfolio are different. Let’s say if a portfolio is live for 3 years and returns generated by the portfolio are 5%, 15% & -7%, respectively, in the first, second and third year. Then we calculate CAGR as a return number that would give the same terminal investment value at the end of three years, as we get when the portfolio gains by 5% & 15% in the first two years and drops by 7% in the third year. The CAGR in this case would be 3.94%. This means that you will always end up with the same investment value at the end of the third year, if your portfolio gains by 3.94% every year or 5%, 15% and -7%, respectively in the first, second and third year.
For portfolios live for less than 1 year, absolute returns in the applicable time period are shown. Only live data is considered for all calculations. Returns and CAGR numbers don’t include backtested data.
Volatility Label
Changes in stock/ETF prices on a daily basis result in fluctuations in the investment value of your portfolio. In order to help investors understand the extent of fluctuation they might observe with their portfolio investment, every portfolio is categorised into one of the three volatility buckets – High, Medium and Low Volatility. This is done by comparing the portfolio’s volatility against that of the Nifty 100 Index.
If the daily change in the investment value of a portfolio is too drastic, it means the prices of stocks/ETFs in the portfolio are changing very rapidly. Such portfolios have High Volatility. Investing in High Volatility portfolios means that changes in your investment values can be very sudden and drastic, whereas fluctuations in the investment value of Low Volatility portfolios are expected to be lower in comparison.
Investment Horizon
For each portfolio, we provide a recommended investment time duration to realise the best returns for the portfolio. Each portfolio has one of the following recommended investment horizons:
- Short Term: For portfolios with a recommended investment duration of <1 year
- Medium Term: For portfolios with a recommended investment duration of 1-3 years
- Long Term: For portfolios with a recommended investment duration of >3 years
Rebalance
Rebalancing is the process of periodically reviewing and updating the constituents of a portfolio. This is done to ensure that constituents in the portfolio continue to reflect the underlying theme or strategy.
Categorisation of Portfolio constituents
All portfolio constituents fall in one of the below categories:
- Large Cap
- Mid Cap
- Small Cap
- Multicap ETFs
- Debt
- Gold
- Silver
- Commodity
- REITs/InvITs
All the stocks listed on NSE(National Stock Exchange) are arranged in decreasing order of Market Cap, so that the stock with the largest market cap gets 1st Rank. Stocks ranked equal to or below 100 are categorised as Large Cap. Stocks ranked below or equal to 250, but ranked above 100, are categorised as Mid Cap stocks. Stocks ranked higher than 250 are categorised as small-cap.
Holdings Distribution
All constituents belonging to a portfolio are categorised under different segments. The weightage of a segment is calculated as the sum of the weights of all constituents belonging to that segment. Suppose 4 constituents, with each having a weight of 10%, belong to the Large Cap segment. Then the weight of the Large Cap segment in the portfolio will be 40% (4*10%).
Determination of comparable index
Each of our portfolios is benchmarked against a market index that best reflects its investable universe.
- Momentum, Focused, and Low Volatility Portfolios
These portfolios select stocks from the Nifty 500 universe. As a result, the Nifty 500 Index has been chosen as the benchmark, providing a broad and appropriate reference point that aligns with the selection base. - Equity Mutual Fund Portfolio
This portfolio invests in active equity mutual funds, many of which derive their exposure across large, mid, and small caps. To ensure consistency and comparability, the Nifty 500 Index is used as the benchmark. - Passive Portfolio
This portfolio primarily consists of ETFs and index funds that track largecap and midcap indices. Accordingly, the Nifty LargeMidcap Index serves as the benchmark, representing a blended exposure to both segments.
- Fixed Income Portfolio
The CRISIL Long Duration Debt A-III Index serves as a benchmark for fixed income funds as it reflects the performance of high-quality, long-duration debt instruments. It helps measure how effectively a fund navigates interest rate cycles while managing duration and credit risk in a stable, low-risk manner.
General Investment Disclosure
Investment in the securities market are subject to market risks. Read all the related documents carefully before investing. Investors should consider consulting their financial advisor while considering any investment decisions.
Risk Disclosure
Please note that investing in securities involves various types of risks that may impact investments. Key risks that can affect all asset classes inter alia include changes in:
- Market volatility
- General market conditions
- Trading volumes/liquidity and settlement periods
- Interest rates
- Rate of inflation
- Domestic and/or global political, economic and financial developments
- Policies and/or legal and regulatory frameworks by the government and other appropriate authorities
Asset class-specific risks inter alia include:
a. Risks related to Equity and Equity Linked Investments (ELIs) include:
Equity shares and equity-related instruments are volatile and prone to price fluctuations on a daily basis. The price of securities may be affected by factors such as price and trading volume volatility, currency exchange rates, company-specific news and rumours, etc. Midcap and smallcap stocks generally exhibit higher volatility compared to largecap stocks.
b. Risk related to investment in Debts, Bonds and Money Market Instruments
- Interest Rate Risk: Changes in interest rates may affect the valuation of securities, as the prices of securities generally increase as interest rates decline and generally decrease as interest rates rise. Prices of long-term securities generally fluctuate more in response to interest rate changes than prices of short-term securities.
- Credit Risk: Credit risk refers to the risk that an issuer of a fixed income security may default or be unable to make timely principal and interest payments on the security. Normally, the value of a fixed income security will fluctuate depending upon the changes in the perceived level of credit risk as well as any actual event of default.
- Liquidity Risk: The liquidity of a bond may change, depending on market conditions, leading to changes in the liquidity premium attached to the price of the bond. At the time of selling the security, the security can become illiquid.
c. Risk related to exposure to Equities, Debt and Commodity through Exchange Traded Funds (ETFs)
- Sector/Index Risk: ETFs that track specific sectors or indices are exposed to concentration risks. Adverse performance in those sectors or indexes can significantly impact returns.
- Tracking Errors: While ETFs aim to mirror their benchmark, they may not perfectly track the concerned benchmark, leading to performance deviations due to factors like expenses or liquidity constraints of the underlying constituents of the ETF.
- Liquidity Risk: In volatile markets, liquidity for certain ETFs may be low, making it harder to buy or sell units without affecting the price significantly.
d. Risk related to Commodity related Instruments
Risk related to commodity (including gold and silver) related instruments are affected by several factors. The price of a commodity may be affected by factors including its demand-supply dynamics in domestic and global markets, restrictions on the movement/trade of the commodity in domestic and global markets, Indian and foreign exchange rates, large scale transactions in the commodity by governments, central banks and other major institutions, etc.
e. Risk related to investments in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
- Sector Risk: Changes in the real estate and infrastructure sector, including changes in applicable laws and regulations, can affect the price and volatility of securities/instruments of REITs and InvITs.
- Interest Rate Risk: REITs/InvITs usually secure loans at the trust level and subsequently distribute the amount among the underlying special purpose vehicles (SPVs). In case of a rising interest rate environment, debt payment increases for the trust and adversely impacts the cash flow for unitholders. This inturn reduces cash flow-based valuations of REITs/InvITs.
- Credit Risk: Credit risk refers to the risk that an issuer of a REIT/InvIT security/instrument may default on interest payment or even on paying back the principal amount on maturity. Further, valuations may be affected by a change in the credit rating assigned to the REIT/InvIT and their SPVs by credit rating agencies.
- Asset Transfer/Acquisition Risk: The valuation of REITs/InvITs heavily depend on the underlying assets held by the trust. There is a risk that the transfer or acquisition of these assets, which often relies on sponsors/management commitments, may not materialise as planned. If the assets are not transferred or acquired, the valuation of the trust and future cash flows may be significantly impacted.
- Risk of lower than expected Distributions: The distribution by a REIT/InvIT will be based on the net cash flows available for distribution. The amount of cash available for distribution principally depends upon the amount of cash that the REIT/InvIT receives as dividends or the interest and principal payments from portfolio assets.
In light of the risks involved, you should transact in securities only after understanding the associated risks. Please consider and assess all risk factors and your risk tolerance before making investment decisions.
Disclosure
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