Fixed income investing is all about finding the right balance between generating income and managing risk. How do experts tackle this challenge, and what does it mean for ordinary investors? Let’s take a closer look.
Understand the risks and rewards
Managing your investments requires understanding how much risk you can handle and whether the returns you receive are commensurate with it. One investment management tool is the GIMS framework, which stands for Gate, Investments, Monitoring and Surveillance. The framework defines guardrails on key risk parameters for a fund’s investments, helping investors optimize returns and achieve their financial goals.
In the gating process, a team of research analysts assess the quality of available investments before onboarding them. They consider the possibility of stress in these investments and their ability to withstand unpredictable circumstances. In the investment process, the fund manager selects a portfolio that has reasonable chances of generating returns while controlling the risks. Regular surveillance and independent monitoring of the portfolio is undertaken to take corrective measures in case of any adverse developments in the portfolio.
Treatment of interest rates
We expect inflation to continue to trend lower in 2024 compared to 2022 and 2023. However, with growth remaining robust, we expect the rate cut cycle to be gradual with cuts of 50-75bps as the base rate. Therefore, the current high interest rates present a great opportunity for patient investors to enjoy significant profits and potentially capital gains as the interest rate cycle shifts towards medium-term funds of 1-4 years.
How much you invest in different types of investments, such as bonds and stocks, depends on what you want to achieve and how much risk you can tolerate. Before you start investing, it’s important to understand your tolerance level for risk. Instead of chasing the investment that promises the highest return, think carefully about what you can afford.
Finally, let’s talk about credit spreads. This is like the extra money you get for taking a little bit of risk by investing in certain bonds that have default risk, rather than government bonds. So investors need to evaluate whether they are being properly compensated for the default risk they are taking on. Currently, the spread or difference between high quality bonds and low quality bonds is less than the spread in the past, so a high quality portfolio is a stronger investment.
Ultimately, investment management is about balancing risk and reward. By using a smart strategy and understanding your goals, you can make the most of your money while ensuring the stability of your fixed income investments.
(The author is Head of Fixed Income at UTI AMC)
Published May 27, 2024 02:07 IST
