loader2
Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

How to Build a Stable Debt Portfolio

13 Nov 2021 0 COMMENT

Introduction

The creation of a portfolio involves the allocation of funds to equity and debt assets. The division of funds between the two types of assets depends upon the goal of the investment portfolio in question and the factors associated with it. Once you understand the intent behind your portfolio creation, you have to decide the kind of risk they are willing to take, the tenure of investments, the level of volatility you are comfortable with, the level of returns they expect from their investments and so on. These factors determine the equity and debt requirements of a portfolio. The goal of debt instruments is to provide stability to the overall portfolio, with the division of funds generally being on a 50–50 basis.

Steps to build a stable debt portfolio

  • The first step towards a stable debt portfolio is to understand why one needs debt funds and instruments in their portfolio. The answer to this will determine the safety and liquidity of the debt portfolio.

  • The second step is to understand the features of the different types of debt funds . The different types of debt funds have different types of risks. Understanding these risks would help investors decide the kind of debt funds they want to invest in and the amount they are willing to invest.

  • The evaluation of any particular fund involves understanding the fund's expense ratio, the quality of credit it has, the average weighted maturity of the fund, and the type of maturity of the fund.

  • The liquidity of a fund is an important consideration. That means that when a fund is redeemed, it should have sufficient assets to liquidate with little to no impact costs. That means the liquidation of some assets should not significantly increase the rest of the assets' risk factors.

  • Investments should not be made based solely on the past performance of debt funds. You must also pay attention to the type of risk associated with it. You may want to consult a financial advisor before making any investments.

  • Layering is also an essential concept in a debt fund portfolio. The idea is to divide the portfolio into two or more categories, with one core portfolio consisting of the bulk of the assets and two or more satellite portfolios.

  • The function of a core portfolio is to provide a safety net for the rest of the investments. A core portfolio generally includes the fixed income securities, usually internally layered into a mix of public Provident Fund (PPF), Employee Provident Fund (EPF), small savings schemes and RBI bonds .

  • One of the satellite portfolios is generally dedicated towards emergency requirements. Since the money from this portfolio may be required at any given moment of time with no notice at all, this portfolio generally consists of liquid funds and ultra short-term funds, which can be easily closed without incurring any significant penalty.

  • Another satellite portfolio would likely be dedicated towards generating higher returns by taking advantage of market conditions. This portfolio would likely consist of dynamic bond funds, credit funds, non-convertible debentures, and gilt funds.

Conclusion

Debt fund investments are used to bring stability to portfolios. An investor must understand their risk appetite and the nuances of the different types of debt funds in order to create a stable debt fund portfolio suited to their needs.

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Mumbai - 400025, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Composite Corporate Agent License No.CA0113, AMFI Regn. No.: ARN-0845. PFRDA registration numbers:  POP no -05092018. We are distributors of Insurance and Mutual funds, Corporate Fixed Deposits, NCDs, PMS and AIF products. We act as a Syndicate, Sub -syndicate member for IPO, FPO. Please note that Mutual Fund Investments are subject to market risks, read the scheme related documents carefully before investing for full understanding and detail. . ICICI Securities Ltd. acts as a referral agent to ICICI Bank Ltd. and ICICI Home Finance Company Limited for personal finance & housing related services & the loan facility is subjective to fulfilment of eligibility criteria, terms and conditions etc. NPS is a defined contribution plan and the benefits would depend upon the amounts of contributions invested and the investment growth up to the point of exit from NPS. Insurance is the subject matter of solicitation. ICICI Securities Ltd. does not underwrite the risk or act as an insurer. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

The non-broking products / services like Mutual Funds, Insurance, FD/ Bonds, loans, PMS, Tax, Elocker, NPS, IPO, Research, Financial Learning etc. are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.