Aligning your fixed income strategy with the new realities

Collectively, these events have affected the bond markets in India, and their effects are likely to continue for some time. The immediate impact of the Union Budget was a sharp rise in yields, with 10-year government securities rising from 6.68% to 6.90%, which effectively meant that the capital values ​​and NAVs of bond and debt mutual funds were negatively impacted. Inverse fluctuations in bond yields and bond prices. This was largely driven by a government borrowing program projected at around Rs. 15 trillion gross, even though the fiscal deficit figure was roughly in line with estimates of 6.4% of GDP.

The Reserve Bank of India (RBI) scrapped several auctions in a post-Budget announcement to calm the nerves in the bond markets, though this may be only a temporary solution. In an added relief to the bond markets, the RBI also left interest rates unchanged after the MPC and continued with its accommodative stance. This was largely driven by the belief that going forward inflation would be significantly lower than market projections, and as evident from the table, MPC estimates were certainly trending downward and, therefore, pleasing.

With oil prices significantly higher than previously expected on the back of a recovery from geopolitical events to global demand and supply disruptions, it appears that the physical risk to inflation may be greater than currently projected. Thus, watch carefully for fluctuations in oil prices and the resulting current account deficit, which could affect the rupee and interest rates.

Therefore, fixed income strategies will need to be built behind these potential risks that could affect investing in fixed income securities. Therefore, it may be ideal to build a portfolio keeping the following in mind:

– Allocate a portion of your investments in liquid and ultra-short funds, so that the interest rate sensitivity of the portfolio remains low and your funds are not materially impacted if interest rates move up.

– If you are using bank deposits/high quality corporate deposits, then go for shorter term deposits to be able to reap the benefits of being able to reinvest at higher rates going forward.

– Allocate a portion of your investments in target-date maturity funds, to reap the benefits of being able to grow your portfolio across different maturities, and reduce concerns of mark-to-market risks as you’ Hold to Maturity’. ‘ Strategy in most cases. The additional advantage of these funds is the low cost and passive strategy, which largely avoids the fund manager’s security selection risks.

Avoid chasing returns through high credit risk instruments even though the credit environment has become better than before. However, the liquidity of the corporate bond market in India means that it remains risky, in the case of securities where there is a risk of bad news/downgrades or defaults that emerge.

– Pay attention to your asset allocation and avoid transferring money from fixed income to equity due to uncertainty in the fixed income market. The downside volatility in equities is very high, and thus allocating the required funds in equities over the next 2-3 years is always a high risk strategy.

– If you are a medium-term fixed-income investor, and do not have short-term liquidity needs, most of your fixed-income allocation needs to continue to be in short-term funds with good credit quality.

The rate hike cycle may be much shorter this time and the interest rate peak may be lower than the previous peaks. Thus, it may not be a good idea to make significant changes to the fixed income strategy based on current data.

Vishal Dhawan is a certified financial planner, and founder and CEO of Plan Ahead Wealth Advisors.