Should Debt Still Be a Part of Client Portfolios?
Diversification or asset allocation, the key principle for portfolio construction, is based on the fact that not all asset classes go up or down in a synchronized manner. Unfortunately, at times of deep stress or Black Swan events, this premise seldom holds true. The issues are so wide ranging that more than one asset class begins to act similarly.
Debt securities, which add stability to the overall portfolio, have shown more volatility than even equity in recent times – the question is not about return on capital anymore, but return of capital. Mutual funds, on the other hand, with the emergence of the advanced Mutual fund distributor software and mutual fund apps for distributors, is witnessing a new rise.
Over a longer period, performance of all asset classes tend to smoothen out and there is still merit in having a diversified portfolio. Having said that, given the nature of the Debt asset class, there is still merit in having this asset class as part of the core portfolio.
This note helps put things in context and gives various options that are available in the Debt space that one can consider. Also, we present a framework for evaluating Debt options, that an advisor needs to consider for their investors.
What To Look For While Investing in Debt?
Investing in Debt is equivalent to giving a loan to someone –a government or a business. In return, you expect to receive interest (which is your return) as well as your principal back, over time.
One can invest in fixed income:
· Directly – Corporate FDs & Debentures, Bank FDs, Government Bonds, PF/EPF, etc.
OR
· Indirectly – Debt MFs which in turn invest in these fixed income instruments.
The 3 factors on which any investment product needs to be evaluated are:
S : Safety L : Liquidity R : Return
Safety is all about return of your capital and Liquidity is about getting your money back when you want.
In times of stress, both these get compromised. For example, Mutual Funds which had at least the assurance of liquidity, had to suddenly “Wind-up” and stop all redemptions or “Side Pocket” such securities which were unable to repay their principal on maturity.
Which Products Fit The SLR Criteria?
Details of some investment ideas in the Debt space:
With recent developments, MFs have been viewed as a risky investment product. But they do offer dual benefit of liquidity and lower taxation (indexation applicable for investment > 3-years). Advisors should continue to access various funds for their specific risk-reward requirements and make appropriate investment recommendations. Also, the new and improved MF distributor software is further adding to the list of benefits. for the advisors.
How are they expected to perform?
Safety-Liquidity-Return Profile
Taxation considered for individual investor in 20% tax bracket). Indicative net yield for MF < 3Y @ 6% & or > 3Y @ 7% ; Indexation at 3.5%. FDs compounded on quarterly basis for 5-year holding period; Cumulative option considered, compounded annually.
Bank FDs: Option to exit with a small penalty; RBI Bonds: Not traded on exit, Hold till maturity; Tax free bonds: traded on exchanges;
PPF: Hold till maturity (can withdraw after 5th years onwards);
Corporate FDs: Can liquidate with minor penal charges;
MFs: Can redeem anytime– exit load may be applicable.
Products apart from Mutual Funds generally provide a high visibility of returns and also merit a place in investors’ core Debt portfolio. Therefore, a Debt portfolio must be designed considering investors tax status, safety, risk appetite and liquidity needs.
ABOUT US
Fintso is a fintech platform that provides solutions to Financial entrepreneurs to address their needs, of research, advisory, product access and client engagement.
The team at Fintso has deep domain expertise on the Indian Investment space, Wealth management and cutting edge Technology.
Meet the Investment Team :
Rajan Pathak
Co-Founder and MD
Rajan was a member of team who launched India’s 1st Multi-Manager and Fund of Funds AMC concept in India. He had also launched India’s 1st Multi Asset, Multi Product “WRAP” Accounts with online action capabilities. These WRAP accounts were Ranked with a 4 Star by Value Research for process and performance. With more than 2 decades of experience in financial markets, Rajan’s accomplishments include establishing successful B2B businesses supporting the financial entrepreneurs. His vast experience & deep understanding of advisor’s need help us build a strong framework of actionable insights.
George Mitra
Co-Founder & CEO
George was part of the Investment Committee and has been instrumental in designing the algorithms for products and advisory in his previous firm. George had helped design the Financial planning software and created the models for Asset Allocation using Efficient frontiers way back in ’00 while in Deutsche Bank. With over 25 years working with Ultra-HNI clients, George has a deep understanding on designing solutions for the end clients.
Kumarpal Jain
Head – 3rd Party products
Over the past 8-years in financial markets, Kumar has developed an intrinsic understanding on different asset classes and built an excellent product knowledge. This in-depth knowledge on markets and products would help us bring best of the advisory to investors to facilitate informed investment decisions. He was a core member of the team that helped create the processes that were used for Fund selection in both his previous organizations.
Follow us on
Website: www.fintso.com
Linkedin: www.linkedin.com/company/fintso
Telegram: t.me/fintso
Contact us on
E-Mail: products@fintso.com
Phone: 022 4897 1500
Disclaimer
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on public available information, internally developed data and other sources believed to be reliable. The directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy,completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations.
Certain statements made in this presentation may not be based on historical information or facts and may be “Forward Looking Statements“ including those relating to general business plans and strategy, future financial condition and growth prospects, and future developments in industries and competitive and regulatory environments. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, they do involve a number of assumptions, risks and uncertainties.
Readers are also advised to seek independent professional advice to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for direct, indirect, special, incidental, consequential, punitive or exemplary damages,including on account of the lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken based on this document.