How to maximise returns from debt portfolio

In the present mounted revenue market, yields throughout the curve have bottomed out and the yield curve is extraordinarily steep. Prevailing time period yields for AAA PSU Bonds as on 4th Jan’22 as per Bloomberg are 4.66% for one 12 months, 5.57% for 3 years, 6.16% for 5 years and seven.03% for ten years.

As charges rise going ahead, the yield curve is anticipated to flatten, which signifies that the shorter finish of the curve (1-3 12 months) is anticipated to rise sooner than the longer tenures (10 12 months).

During the IL&FS disaster in November 2018, the yield curve was flat and yields had been a lot larger. For occasion, the one-year AAA yield & the 10-year AAA yield had been each at 8.8%.

Prior to the pandemic, a easy technique of holding a debt fund with underlying credit score high quality being AAA and three-year maturity would have sufficed to beat retail inflation, which generally averages at 6% every year in India.

However, with prevailing yields being so low, this technique wants a whole overhaul.

Short maturity funds should not adequate to beat inflation, whereas having solely lengthy length funds (10 12 months maturity) poses excessive rate of interest sensitivity and is topic to excessive volatility.

A ‘Barbell’ mounted revenue funding technique entails making a portfolio with a mixture of brief time period debt devices and long run debt devices to get an optimum mixture of yield and length (rate of interest sensitivity).

In right this moment’s context, we advise making a barbell portfolio the place (i) 65-70% ought to be invested in AAA-oriented roll-down technique funds with 3-5 12 months maturity the place yields are within the vary of 5.50-6.00% p.a., and (ii) the stability 30-35% may be invested in AAA-oriented roll-down technique funds with 10 12 months maturity the place yields are nearer to 7% p.a.

This would successfully present a portfolio the place the weighted common maturity profile is round 5.5 years (i.e. length of ~4 years), and importantly the yield might be barely larger than 6% p.a.

At the identical time, roll-down methods would be certain that rate of interest sensitivity or portfolio length retains decreasing with each passing 12 months.

Passive roll-down debt funds, e.g. Bharat Bond funds, PSU Bond plus SDL funds, are greatest suited to assemble such barbell portfolio technique as their portfolios consist solely of AAA-rated devices and State Development Loans (SDL), the latter being at par with G-secs in relation to sovereign credit score.

Note that this technique is usually recommended for these buyers with minimal three-year funding horizon. Debt funds should be held for 3 years to qualify for long run capital positive aspects tax at 20% with indexation profit.

(Nitin Shanbhag is head of funding merchandise at Motilal Oswal Wealth.)

Subscribe to Mint Newsletters * Enter a sound electronic mail * Thank you for subscribing to our e-newsletter.

Never miss a narrative! Stay linked and knowledgeable with Mint.
Download
our App Now!!