Prudent investors understand that it is vital to diversify their portfolio through an asset allocation that balances growth, liquidity and safety; keeping in mind their risk appetite and the investment horizon.When it comes to equity, most advisors recommend diversifying across funds with different market-caps, investment styles, sectors or themes. They may readily advocate the SIP or Systematic Transfer Plan (STP) route, since it enables regular, disciplined investing and leverages rupee cost averaging to your benefit. However, when it comes to debt, is the same rigour evident? Debt investing deserves the benefit of a nuanced allocation strategy and regularity of investing, as is generally practised for equity funds.We suggest a structuring for your debt fund allocation across three distinct buckets: Liquidity, Core and Satellite. The Liquidity bucket focuses on meeting emergency requirements, a need which overnight and liquid funds can easily satisfy. The Core bucket is meant to offer stability and security across the chosen investment period, and often forms a substantial portion of an investor’s fixed-income allocation. Funds that invest predominantly in the highest quality instruments with low to moderate maturity profiles should be chosen here. The Satellite bucket aims to generate some ‘extra’ return, and can undertake higher duration or credit risk based on market cycles. Actively managed gilt, dynamic bond funds and credit risk funds or funds that do not have predominantly AAA rated papers may be chosen in this bucket.
With the growing popularity of SIPs, the use of this disciplined method for regular investing seems surprisingly tilted. Industry data suggests that the overwhelming proportion of SIP flows are directed towards equity assets, with debt forming under 5% of monthly flows.A simple solution to ensure that your targeted asset allocation is always maintained, is to plan your SIPs in not just equity-oriented funds, but also in fixed income funds. Systematic Investments in Fixed Income (SIFI) could help generate relatively better risk-adjusted returns and can aim to cushion the impact of higher volatility in equity markets. By balancing risk and maintaining your targeted allocation, portfolio drawdowns will be shallower, helping investors resist any behavioural urge to take unwarranted action like pausing SIPs or redeeming, consequently staying invested longer. This in turn will help their portfolio get a relatively better chance of delivering their targeted return. Let’s look at an illustration to see how this may work. Say an investor is targeting a 60:40 allocation between equity and debt. As is evident from the table, a blend of Equity SIP and systematic investment in fixed income can be a powerful technique to navigate through market uncertainties while maintaining an appropriate long-term target asset allocation. As expectations of rising global and domestic interest rates build, SIFI can help average your cost of purchase in an environment that can be volatile for debt returns. Investing systematically in debt mutual plays an important role in balancing allocations and helping you stay invested over the long term.
Vishal Kapoor is CEO at IDFC AMC.
