Friday Podcast 15th November 2013
In our last week’s podcast I highlighted the various fixed income investment options that are available to you. In this podcast I will take you through five easy steps involved in construction a fixed income portfolio that is right for you.
The first step in fixed income portfolio construction is to ask yourself “why am I investing in fixed income assets? Salaried individuals have a percentage of their salary deducted for provident fund investments and that cannot be helped. The fact is that provident fund returns of 8.5% or higher rarely compensate for inflation that is felt first hand.
Fixed income investments over and above the compulsory provident fund investments should have a purpose. The purpose can vary from steady return preference to view on other asset classes. Once you have defined your purpose your question on “why am I investing in fixed income assets?” is answered.
The second step in fixed income portfolio construction is to identify the right fixed income products that fit in with your purpose. If you require steady, safe returns then low risk products such as small savings schemes, fixed deposits or liquid fund schemes of mutual funds are the right products for you. If you believe fixed income as an asset class will outperform other asset classes due to various reasons, risk free government bonds, high safety corporate bonds or mutual fund schemes that invest in these bonds are right for you.
The third step in fixed income portfolio construction is to analyse what returns you require from your fixed income investments and the risk you are willing to take for the returns. The tenet of higher returns entails higher risk is true for fixed income investments. The risks range from interest rate risk to risk of default.
The fourth step in fixed income portfolio construction is to build a portfolio that meets your return requirement and does not exceed your risk taking capability. The portfolio should be constructed with the products identified for the portfolio and assigning the right weights to the products in the portfolio.
The fifth step in fixed income portfolio construction is to constantly rebalance portfolios based on your own expected returns against the fixed income market outlook. For example a portfolio constructed when interest rates were falling would not be the right portfolio at a time when interest rates are rising.
The fixed income market may look esoteric but once you break it down to two factors that are interest rate outlook and risk of default outlook, it is easy to construct a vibrant fixed income portfolio.
Enrol for our Weekend Online Fixed Income and Currency Markets Training Program. Please call toll free 1800-102-1611 or log in to INRBONDS.com for details.
Thank you for listening in and have a good weekend.