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.
· 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?
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.
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 :
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.
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.
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.
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