Prudent investors understand that it is important to diversify their portfolio through an asset allocation that balances growth, liquidity and safety; Considering their risk appetite and investment horizon. When it comes to equities, most advisors recommend diversifying funds with different market-caps, investment styles, sectors or themes. They can easily advocate for the SIP or Systematic Transfer Plan (STP) route, as it enables regular, disciplined investments and leverages rupee cost averaging to your advantage. However, when it comes to debt, is the same rigor evident? Debt investing is entitled to the benefits of a micro allocation strategy and regularity of investment, as is usually done for equity funds. We suggest a structure for your debt fund allocation in three different buckets: Liquidity, Core and Satellite. Liquidity Bucket focuses on meeting emergency requirements, a requirement that can be easily met by overnight and liquid funds. The core bucket is meant to provide stability and security over a chosen investment period, and often forms a substantial portion of an investor’s fixed-income allocation. Funds that invest primarily in the highest quality instruments with low to medium maturity profiles should be chosen here. Satellite buckets are intended to generate some ‘extra’ returns, and may carry higher term or credit risk depending on market cycles. Actively managed gilts, dynamic bond funds and credit risk funds or funds that primarily do not have AAA rated papers can be selected in this bucket.
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With the increasing popularity of SIPs, the use of this disciplined method for regular investments seems to be surprisingly frowned upon. Industry data shows that a huge proportion of SIP inflows are directed towards equity assets, with debt accounting for less than 5% of the monthly inflows. A simple way to ensure that your target asset allocation is always maintained is to plan your SIPs not only in equity-oriented funds, but also in fixed income funds. Systematic investing in fixed income (SIFI) can help generate relatively better risk-adjusted returns and is aimed at mitigating the effects of high volatility in equity markets. By balancing risk and maintaining your targeted allocation, portfolio drawdown will be lower, helping investors to resist any pragmatic urge to take unreasonable actions such as pausing or redeeming SIPs, resulting in long-term investments. Will be done. This in turn will help their portfolio have a better chance of delivering their targeted returns. Let’s take an illustration to see how this can work. Suppose an investor is targeting an allocation of 60:40 between equity and debt. As is evident from the table, a mix of equity SIPs and systematic investments in fixed income can be a powerful technique for navigating through market uncertainties while maintaining proper long-term target asset allocation. As expectations of a rise in global and domestic interest rates increase, SIFI can help you average out the cost of your purchases in an environment that can be volatile for loan returns. Debt plays a vital role in systematically balancing the investment allocation in mutuals and helping you stay invested over the long term.
Vishal Kapoor is the CEO of IDFC AMC.
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