Friday Podcast 8th November 2013
Transcript of Podcast
Have you mapped out your fixed income portfolio recently? If yes, ask yourself these two questions. What is the weighted average return that the portfolio is expected to generate in the next one year? Is the portfolio tying in with your return expectations? The first exercise will make you assign weights to each individual fixed income investment that you have made and the second question will force you to ask yourself why you have made the investment.
Fixed income is the most oversold of all investments and the least understood of all investments. There are a myriad of fixed income products for you to invest in. The products include Bank Deposits, Company Deposits, Small Savings Schemes, Non Convertible Debentures (NCD), Tax Free Bonds, Mutual Fund Schemes, Insurance linked investments and Government and Corporate Bonds. The unregulated market has chit funds and other so called guaranteed return schemes that are meant to guarantee returns for the promoters of such schemes!
The fixed return instruments such as Small Savings Schemes and Bank and Company Deposits usually form a large part of many portfolios as they come with a principal back and assured interest tag. The only worry that you face is the depletion of your corpus due to inflation. Many of you would have found this out the hard way as inflation has been running well over the returns of around 8.5% generated by such risk free investments.
The question then arises is what are the other choices? You can go and invest in high yield NCD issued by companies that carry a good safety rating but do not carry the highest safety rating. How much will you invest in such NCD, a large part of your portfolio or a small part of your portfolio? Low weights in high yield NCD will not do any wonders to your portfolio and will make it that much more illiquid while high weights in NCD can help boost portfolio returns. However are you willing to carry that extra risk on safety of principal?
Tax free bonds can provide good effective returns adjusted for tax but what you get in hand is below what you would receive from investments in higher yielding instruments. Government and corporate bonds are not easy to invest in as the bond market is geared towards institutional rather than retail investors.
Insurance linked investment products come with hefty cost that completely takes away any kind of reasonable return expectations.
Mutual funds have a wide variety of fixed income products to offer from those competing with bank deposits to those that provide access to the government and corporate bond market. What part should mutual fund fixed income schemes play in your portfolio and what weight they should carry in your portfolio? More importantly, which Asset Management Company should you invest in given that there are 40 plus of them. Investing in too many schemes clutter up portfolios and makes performance tracking difficult.
So how do you construct a fixed income portfolio that is right for you? The next week’s podcast will take you through the steps involved in construction a fixed income portfolio that meets your end objectives.
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Thank you for listening in and have a good weekend.