How to build a debt portfolio despite interest rate volatility

KIRTAN SHAH: I don’t want to go back to that very basic saying, “keep the money at the lower end of the curve”. There are three ways I will look at this situation.

The first way is to keep it simple, just like you would with a fixed deposit. If you really want to deploy that money for three years, try to find a fund that will have an average maturity of three years like you would with a fixed deposit. If you want to invest for three years, you try to make a fixed three-year deposit.

This will ensure that in the short term, if there is volatility at the end of the day, you are able to follow the volatility curve because you are able to invest. The easiest way to do this is to try and match your time horizon with the average maturity.

The second is a more asset allocation based approach, where (you) try to divide that fixed income investment into three compartments. First, make liquidity, second, make kernel, and third, satellite or tactic.

So let’s say you have 10% of your money or 15% of your money in liquid funds or ultra-short term funds. Much of this will allow you to take care of the liquidity you need as your risk profile grows, and create the 70% core market.

So if you are conservative, try to keep this in short term debt funds. If you are moderate, you can do banking and corporate bond PSU funds. Let’s say you are aggressive, you can do a combination of medium term funds and credit, depending on your risk profile; it’s 70% and the remaining 20% ​​are satellites or more aggressive. Having a small portion of your wallet that is slightly aggressive than your heart and liquid is good. And this is how an asset allocation is usually done.

So, depending on your risk profile, you choose which part of your portfolio you want to keep for this 20%. Let’s say if I’m conservative and kept 10% in cash, 70% in short-term debt funds, the remaining 20% ​​can probably go in a combination of 10% medium and 10% credit. It depends again but to a large extent it will diversify the portfolio.

The third is more tactical in nature. For someone who understands fixed income or thinks the advisor understands and will advise correctly, if you looked at the historical data points over the past 20 years, you would find that with every rise in interest rates, the market bar as a strategy has really worked for investors.

Keep it very simple. You have Rs 100 to invest, put Rs 50 at the lower end of the curve and put Rs 50 at the upper end of the curve.

This strategy has almost always worked in a rising interest rate environment, but you should only do it with an investment horizon of at least three years in mind, otherwise you’ll end up on the wrong side.

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