Core
- Debt allocation differs from personal borrowings, and fixed income doesn’t imply a steady income payout.
- A debt or fixed income portfolio is the shock absorber & anchor to an investment landscape. It offers stability and minimizes the bumps along your investment journey. Debt/Fixed-income instruments are mostly IOU’s (I Owe You) available usually in the form of bonds (or debentures). The principal issuers of these instruments are banks, companies, states/countries (i.e., governments) and public bodies.
- Debt can be broadly categorized into passive and active debt. For savers, the former is a simple & straightforward saving instrument. Think, bank deposits (FD’s & RD’s), corporate bonds & debentures, government & RBI bonds, small-savings schemes (NSC’s, Post-office savings schemes, Provident funds etc.) These instruments make up for most of passive debt instruments and are more reliable in protecting the capital (as many instruments are backed by the state). On the other hand, market-linked instruments & products that fundamentally relies on generating returns based on the performance of underlying “tradeable securities” are termed active debt. These consist of debt (including liquid and short-term debt funds) & hybrid mutual funds, AIF’s (Alternative Investment Fund), REIT’S (Real Estate Investment Trust), INVT’s (Infrastructure Investment Trust) etc. Understandably, both capital and returns from these instruments are subject to change with external factors like country’s general economic conditions, inflation, interest rates, credit worthiness of the issuer etc.
- The principal idea behind building a core portfolio is to strike a balance with “other investments” that display extreme volatility. On the flip side, returns from such portfolios are nominal at best and therefore best suited when the time horizon is near to medium term with a few exceptions (retiral benefits).
- A few pointers before building a core portfolio;
- Inclusion of active or passive debt into your investment landscape must be based on a few factors that include liquidity requirements (i.e. quantum of money), time duration and appetite for volatility.
- Inclusion of active or passive debt into your investment landscape must be based on a few factors that include liquidity requirements (i.e. quantum of money), time duration and appetite for volatility.
- Actively-managed debt portfolios offer higher returns (i.e., at market rates) however, returns over and above the risk-free rate of return brings an element of volatility along.
- Factors like returns, taxation, dividends, strategies etc., are all legitimate considerations but don’t let these pitches override your comfort with volatility. Align your choices with your core values.
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