It is a widely known fact that a well-defined asset allocation is the key to wealth creation. Often, individuals tend to focus on getting the equity portfolio allocation right, given the plethora of options available. However, when it comes to deciding the debt portion, investments are often relegated to traditional investment avenues; giving debt market instruments a miss. The close relation of debt instruments with the various macro parameters, especially interest rates, make them an intriguing investment.
Options available: Similar to the equity universe, debt market too offers investment options for varying tenor and risk profile, suitable to match every investor’s requirement. Duration (short, medium, long term) and accruals are the most prevalent type of funds.
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Liquid Funds are ideal for investors wanting instant access to their money, which is typically set aside for contingencies, making them one of the best alternatives to idle money. What makes this category even more attractive is the instant withdrawal option available in these funds, making the invested sum easily accessible.
Ultra Short Term Funds are like liquid funds and provide an ideal investment option for very short term investment. Investors who have short term surplus for a time period of approximately 1 to 9 months could consider these funds.
Short Term Funds are ideal if you don’t need instant liquidity but may need the money over a period of the next one year to fulfill a short term goal, like paying off a loan or making a purchase.
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Credit Opportunities are the type of funds which aim to generate returns primarily in the form of accrual income as it holds papers with moderate duration.
Income Funds invest mostly in fixed income securities like bonds and debentures, wherein the fund manager manages the portfolio based on interest rate movements, with an eye for capital appreciation. Here, an investor can opt for funds as per one’s investment horizon. Within these, dynamically managed income fund is the most popular.
Investment approach: Most often while making debt investments, investors tend to second guess what the Reserve Bank of India (RBI) is likely to do in the next Monetary Policy and then make a choice of investment. This approach can prove to be rather erroneous. However, there is a category of fund which is positioned to tap into all the opportunities available in the debt market, irrespective of the interest rate direction. Such funds are known as dynamic duration funds, which are dynamically managed to match the market trend.
These dynamic duration funds can be model based too. What this essentially means is that the fund manager will use the model to take duration calls. For example: ICICI Prudential Long Term Plan is a model based income fund that aims to dynamically manage duration in the range of 1 to 10 years based on an in-house debt valuation index model.
Being a model based fund, the structure allows the fund to trade market volatilities by buying low and selling high. As a result, dynamic duration funds can follow different portfolio strategies in different market scenarios. This effectively means that one need not time their investments and hence, this fund can be considered to be a part of one’s core portfolio, irrespective of the market cycle.
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Manish Banthia
Senior Fund Manager, ICICI Prudential AMC
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