Your Investments Must Help You Build Wealth

Curated fixed-income portfolio provides the desired exposure to G-secs in an efficient and cost-effective manner

Your Investments Must Help You Build Wealth
Your Investments Must Help You Build Wealth
Ujjwal Jain - 26 February 2021

The reason why you save and invest money is to achieve your financial goals and protect your future. This means that the investment decisions that you take should ensure the growth of your wealth as well as its protection. Generally, equity investments are considered as good vehicles for long-term growth, while debt investments are believed to be for portfolio protection. It is, however, important to note that even within the wide gamut of debt investments, not all categories of investments will provide the desired safety or risk-adjusted returns. At one end of the spectrum, you have bonds issued by the government or by Public Sector Undertakings (PSUs) that have zero to negligible credit risk and are considered safe from a default perspective. At the other end of the spectrum, you have bonds issued by investment grade corporates which are riskier than other categories.

A Layer Of Protection

From the perspective of credit risk, adding government bonds and securities to your portfolio can be particularly value accretive. These are fixed-income papers issued by the Government of India and are backed by sovereign guarantees. As an individual investor, you can access these securities either directly or through debt mutual funds. The government securities (G-sec) market in India is dominated by institutional investors such as banks, mutual funds and insurance companies. These entities trade in lot sizes of Rs 5 crore or more, making it very challenging for the retail investor to participate in the market.

As a result, retail investor participation in the G-sec market is very low. To give this a fillip and make the process of trading G-secs smoother for the retail investor, the government announced a new set of norms recently. Under these norms, individual investors will be allowed to open a gilt account in the RBI’s electronic platform E-kuber.

This leaves debt mutual funds that invest in government securities and PSU bonds as the only feasible investment option for retail investors. Despite this, retail (investment of less than Rs 5 lakh) participation in debt mutual funds in India is low. Of the total debt mutual fund assets under management (AUM) of Rs 14 lakh crore, retail AUM stands at a minuscule Rs 1 lakh crore. Thus, to facilitate better access to such securities, we need to create alternate investment vehicles. A great option would be through a curated portfolio or basket.

Curated Investment Baskets

Smartly curated portfolios can enable better access to debt investments. These can be pure G-sec portfolios or comprise a mix of G-secs, PSU bonds and corporate issuers. For a retail investor, buying such a curated fixed-income portfolio can provide the desired exposure in an efficient and cost-effective manner.

Dwelling on the cautions, please note that credit risk is not the only risk that debt investors need to deal with. They also need to contend with interest rate risk or change in bond prices in response to changing interest rates. As interest rates rise, bond prices fall and vice-versa. Additionally, bonds with a longer maturity tend to be more sensitive to changes in interest rates. Curated portfolios can actively manage this risk by creating a portfolio where credit quality and portfolio duration can be dynamically adjusted.

What retail investors require is easy and cost-effective access to innovative investment solutions. Curated investment baskets can effectively meet these imperatives and encourage retail investor participation in not only G-secs but a wide variety of debt instruments.

The author is CEO and Founder of WealthDesk

DISCLAIMER: Views expressed are the author's own. Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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