The Mutual Fund Show: How To Build A Debt Portfolio Amid Interest Rate Volatility

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

The first way is keeping it simple, like you would do in a fixed deposit. If you really want to deploy this cash for three years, try and find a fund which will have three years of average maturity like you would do in a fixed deposit. If you want to invest for three years, you try and do a three-year fixed deposit.

This will make sure that, in the near term, if there is volatility at the end of the day, you are okay to ride the volatility curve because you are okay to invest. The simplest way to do it is to try and match your investment horizon with the average maturity.

The second is a more asset allocation-based approach, where (you) try and split this fixed income investment into three buckets. First, do liquidity, second, do core, and third, do satellite or tactical.

So, let’s say you have 10% of your money or 15% of your money in liquid funds or ultra-short-term funds. That will largely take care of the liquidity that you need as and when depending on your risk profile, and create the 70% of core market.

So, if you are conservative, try and keep that in short-term debt funds. If you are moderate, you can do banking and PSU corporate bond funds. Let’s say you are aggressive, you can do a combination of medium-term funds plus credit, depending on your risk profile; that’s 70% and the remaining 20% is satellite or more aggressive. Having a small part of your portfolio, which is slightly aggressive than your core and liquid, is okay. And that’s how an asset allocation is typically done.

So, depending on your risk profile you choose what part of your portfolio do you want to keep for this 20%. Let’s say, if I am conservative and I have kept 10% in liquid, 70% in short-term debt fund, the remaining 20% can probably go as a combination of 10% in medium and 10% to credit. This depends again but largely this will diversify the portfolio.

The third is more tactical in nature. For somebody who understands fixed income or believes that the adviser understands and will advise correctly, if you looked at historical data points over the last 20 years, you would see that in every interest rate rising, market barbell as a strategy has really worked out for the investors.

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

This strategy has almost always worked in a rising interest rate environment, but you should only do this with at least a three-years investment horizon in mind or you will get caught on the wrong end.