- Wealth PMS
Research says Asset Allocation trumps Security Selection over the long term. Debt is an effective counter-balance to equity in any portfolio. Like the boring parent who is constantly reminding you to wear your helmet when you’re about to go biking, the debt cushions market falls and allows you to sleep better at night.
Step 1 for any investor needs to be to determine their Debt-Equity allocation. Contrary to the 100 minus age formula, the right allocation is person-specific. If a 20% drop in markets will give you ulcers, then your debt allocation needs to be higher than your peers, irrespective of your age or other demographics. Read: How to think about asset allocation in India.
Note that even these are not risk-free. The return for holding risk-free instruments, would well, be the risk-free rate of return.
How it works
What is the idea of a fixed income portfolio? Does it actually pay out fixed income?
No. The fixed income portfolio is meant to just invest in fixed income with the goal of getting greater returns by looking at the interest rate cycle. So:
- When interest rates are likely to rise, in our opinion, we will move to shorter term bond funds.
- When rates are likely to fall, we will move into longer duration debt funds
Also, to note, we keep a close eye on credit risks. When risks to corporate credit are high, we may sit in PSU, Banking or Government bond funds only. When the economy is doing well, we will work our way back into corporate bonds.
But this is not optimal for taxation as you may exit before three years?
This is true. We do not optimize for capital gains. We focus on the interest rate cycle. There can be losses in the rate cycle that may hurt far more than the tax component, or in credit risk. However, we’ll try and stabilize into a portfolio that doesn’t rock the boat too much and just rebalanced 20% to 30% of itself, so that the remaining 70% is carried forward.
How often will you rebalance?
Typically we don’t expect to do a rebalance more than once in two years. But when markets are volatile we may take an intermediate call.
Can we invest all at once?
You don’t have to “SIP” here. The idea of fixed income is that you are likely to want to store something as debt or low volatility, and this portfolio tries to meet those objectives in the medium term. So the idea is to use a portfolio like this to allocate your savings, or some part of it, to fixed income. If your savings are monthly, you can consider using this portfolio monthly. If it’s a lump sum, then it can go all at once too.
Get access to this Low Volatility portfolio along with investible insights & research, 5 other model portfolios, active strategies, and access to the slack community!
We regularly publish updates for the portfolio. Recent ones are here:
- Oct 2022: Should you lock in long term yields now?
- Jan 2022: Reducing Gilt Mutual Funds to add a Floater
- Sep 2021: Adding exposure to REITs and INVITs
- Dec 2020: Why liquid Funds will suck and Portfolio Changes
- Aug 2020: Why are Gilt funds down? And Changes to Fixed Income
- Apr 2020: Fixed Income Portfolio changes to more safety
- Sep 2019: Even more into Gilts, Add Corporate Bonds
- Dec 2018: Back to Gilts as Rates Look Like They Will Soften
- Feb 2017: Moving back to ultra short-term funds
- Nov 2016: A 24% return in fixed income
- Sep 2016: Continue with Gilts, Hold Dynamic Bond
- Jan 2015: Falling Rates, Go into Gilts and Dynamic Bonds