Creating a vibrant fixed income portfolio

Creation of a vibrant and strong fixed income portfolio is an important task as far as the investor is concerned because this will help them to manage their money better. A lot of focus is given to the equity portfolio but some effort is also required on the debt or the fixed income side. Most people take into account individual holdings that are in the nature of fixed income instruments but never give a thought to the portfolio as a whole. This often leaves some gaps in the portfolio which ensures that they miss out on some of the opportunities that could have been utilised effectively. Here is a look at how some steps helps in this entire effort for the individual. (Click here to login to your portfolio)

Mixture of instruments

One of the common mistakes that a lot of people make is to have only a single type of instrument in their fixed income portfolio. This means that some of them will just have bank fixed deposits with them and such a situation makes the portfolio one dimensional.  The selection of the instrument depends on their personal preference so someone else would just use some postal office instruments or just debentures and this raises the risk so it is not a healthy sign.

There are a lot of instruments that are present in the market and this includes bank fixed deposits, company fixed deposits, postal instruments, bonds, debt mutual funds and debentures and hence these can be used as per the specific requirement of each investor. Each one of them has their distinctive features and they can be used for different purposes. Investors must try and ensure that they make use of the choice in front of them and not just restrict themselves to one or two instruments.

Specific need and strategy

Another point that also needs to be considered is that there is no common solution for each person. So while one individual might have a higher proportion of fixed deposits in the portfolio there could be others who would be more comfortable with a larger proportion of bonds and debentures. There has to be a provision for this kind of separate position for different individuals and this means customisation for each individual based on their features. The areas that will be impacted here include the types of instruments used, the exposure to each instrument and the time and manner in which they will be sold. Investors need to have a clear strategy that will help them in constructing a portfolio of instruments that meets their specific needs. This could mean ensuring that they lock themselves in for a longer duration when interest rates are high for their long term needs or keeping specific amounts in very short term instruments and so on.

Many factors to be considered

It is vital that every investor considers factors other than just the returns for the purpose of building their fixed income portfolio. It is not necessary for the portfolio to consist of only very high return instruments.  For example liquidity could be a very vital factor for a person who does not have a high amount of liquid savings and hence for such people it is important to ensure that they do not lock their investments in for long time periods. A senior citizen might have a high priority for a regular payout and hence there can be selection of options that could ensure that there is a monthly or a quarterly receipt that comes in for them. 

Do not have similar maturity 

One factor that every investor should take care of while looking at their fixed income portfolio is also the maturity period of the various investments. Fixed income instruments will usually mature after a specific period and the time of maturity should be spread out so that there is not a big risk in trying to reinvest the amounts when they mature. Otherwise there could be a situation that the investor faces a very tough situation when a lot of high interest yielding instruments mature at the same time and then get converted into low interest yielding securities. This can ensure a sharp drop as far as the overall returns are concerned but this can be avoided by going in for different maturity periods for the different instruments.

Look to gain from price changes

A vital aspect of the fixed income investments  that most retail investors ignore is that there is opportunity to gain not  just from the coupon rate which is the interest rate paid on the instrument  but also from the change in the price of the instruments. There are a lot of instruments that are traded in the debt markets like bonds and government securities.  The price movement of these instruments is inverse or opposite to the movement of the interest rates in the economy and hence there is a situation where the investors can also gain from a situation when the interest rates are moving downwards. Most people feel dejected when the interest rates are falling as they think this will result in a lower return for them but they can ensure that by investing in debt mutual funds or even by buying and selling bonds and debentures in the secondary market they are able to generate a high rate of return that will face up to the challenging times on the interest rate front.

Arnav Pandya

The author can be reached at arnavpandya@hotmail.com