Fixed Income investment strategies (Thread)

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It’s a misconception that FD, RBI Bond, PPF etc have no risk. The reason we don’t see the risk in them is because for us, risk ONLY means loss of capital. (1/n)
1. There r 3 risks to keep in mind while we do fixed income investing

a. Default Risk-Investment has a risk of default. You might not get paid the interest or ur capital may not come back in full. FD, RBI Bonds, PPF generally may not have this risks but corporate FD’s do (2/n)
b. Interest Rate Risk-After u invest, Interest rates going up or down can also be a risk

(i) Imagine investing in a bank FD for 5 years at 5% right now & a year later interest rates go up, u will still keep receiving the same 5% & not the increased rate, this is a risk (3/n)
(ii) Investing in an FD at the peak of say 8% for 1 year & after 1 year when you receive the maturity & you try & reinvest, the rate on the new FD is lower say 6%, this is also a risk, re-investment risk. FD, RBI Bonds, PPF – Have this risk. (4/n)
c. Liquidity–How soon can u get ur investment back at fair value?

Lets say if u invest in a PPF, lock-in theoretically is 15 years. If u invest in a bank FD for 5 years & try removing before 5 years, there will be a penalty. Again FD, RBI Bond, PPF all has this risk (5/n)
(2) What should investors do?

Investors first have to decide which risk are they willing to take. Each instrument will have some or the other risk. Like say,

(a) Fixed Deposit – Has Interest rate risk & liquidity risk
(b) Corporate Deposits – Has all 3 (6/n)
(c) Government Securities – Liquidity & Interest rate risk
(d) Mutual Funds – All 3 risks are expected to be managed well, provided you have picked the right scheme depending on your requirement. (7/n)
Nothing in fixed income is fixed and everything has risk. You have to decide which and how much of the risk are you comfortable with for the return expectations you have. (8/n)
3. How do u access risk? What do u keep in mind?

Investors should follow an asset allocation. Lets say I am a conservative investors, I will invest 80% in debt & 20% in equity. The point is don’t invest all 80% of debt in the same product. Split the 80% into 3 different buckets
(a) Liquidity portfolio – This is the portfolio, which allows you to have liquidity whenever required. 10% of your debt portfolio can be here (80% * 10% = 8%) (10/n)
(b) Core debt portfolio – This portfolio is the main portfolio investment. Depending on your requirement in terms of risk and return, 70% of your debt portfolio can be here (80% * 70% = 56%)(11/n)
(c) Tactical portfolio – Here is where some tactical call on debt can be taken to generate slightly superior returns on the portfolio. 20% of your debt portfolio can be here. (80% * 20% = 16%) (12/n)
(4) So what falls in Liquid, core and tactical portfolio?
The image is strictly for education purpose and is subjective. (13/n)
(5) Why so much of MF suggestion?

MF’s in my opinion will be able to offer a better risk adjusted return. Ofcourse we can argue Franklins case here but generally I would prefer an MF to most other products,

(a) Liquidity is available in T+1 days (14/n)
(b) Interest rate risk–There r multiple schemes 2 choose 4m where this can be controlled
(c) Default–Each scheme invests in 50+ bonds roughly, even if 1 bond defaults the over all impact is less
(d) Tax – If we stay invested for 3 or more years, the tax advantage is high (15/n)
If v invest in FD @ 6% & r in the 30% tax bracket, the post tax return will b 4.2% but if an MF earns 6% (everything else same) & inflation is 5%, MF r taxed 20% only on the differential 6% - 5% = 1% * 20% = 0.2%. So the net return v make is 6% - 0.2% = 5.8% vs 4.2% in an FD
(6) What can be recommended to a senior citizen right now?

(a) Senior citizen savings scheme – 7.4%
(b) LIC Pradhan Mantri Vaya Vandana Yojana (PMVVY) scheme – 7.4% (**END**)

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More from @kirtan0810

17 Nov
Index Funds v/s ETFs

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(1) While index funds and ETF’s look similar, there are multiple differences you need to keep in mind before investing in either of them. Let me highlight the important ones (1/n)
(a) NAV – Index funds can be bought/sold like any other open-ended MF at the day end NAV from the AMC where as ETF’s can be bought like a normal stock during trading hours at the real time NAV/Traded Price or iNAV (2/n)
(b) Expense Ratio – Theoretically, expense ratio of ETF is less than Index funds but it does not include the brokerage to be paid while buying/selling the ETF through a broker on the exchange and hence don’t compare expense ratios directly between Index and ETF’s. (3/n)
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13 Nov
What better day to discuss Gold, isn’t it?

Topic - Physical Gold v/s Digital Gold v/s Gold ETF v/s Sovereign Gold Bond (SGB)


(1) Physical Gold – Buying gold from your friendly jeweler or bank

(a) Pro
(i) Tangible (You can touch it)
(ii) Buy in cash, confidentiality, difficult to trace
(iii) No maximum limit on buying
(iv) Highly Liquid

(b) Cons
(i) Storage/Theft
(ii) Purity (Cheating)
(iii) Making Charges (upto 35%)
(iv) Taxation vs SGB
(v) GST – 3% on selling gold
(vi) Inconsistency of pricing across sellers & spread vs traded gold
(vii) No regulator

Read 17 tweets
9 Nov
Alpha is not fund return – index return (excess returns over benchmark), that’s called active returns and not Alpha.

Alpha means excess returns over ‘minimum expected returns’ from the fund

(A thread) (1/n)
What is the minimum expected return from a fund?
Depends on the risk the fund is taking
a. If the fund is taking risk same as the index, minimum expected ME return from the fund is same as the Index.
b. Fund is taking risk higher than the index, ME is higher than the index (2/n)
(c) Fund is taking risk lower than the Index, ME is lower than the index

You should not look at only beating the index; you should look at beating the minimum expected return based on the risk the fund takes, which is Alpha. (3/n)
Read 12 tweets
30 Sep
(Thread) Understanding Real Estate Investment Trust (REITs) – This is for education purpose and the story is made up to simplify the concept, don’t take it at face value (1/n)
Lets say I am a RE developer, K Raheja. I like a land in Mumbai & Hyderabad 4 some commercial development. I decide to buy it. Where will I get the monies 2 buy & construct it?
(1) Self
(2) Bank, NBFC, MF - Debt
(3) Partner – someone else investing as Equity (2/n)
So I invest some monies, got some 4m banks & MF’s & I also got Blackrock to invest 2 buy the land & make the business park called Mindspace. I constructed around 23-mn sq ft with multiple building & I started leasing them out to companies who wanted rented office premises (3/n)
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13 Sep
Parag Parikh Long Term Equity fund will be introducing 'covered call strategy' in the fund. This can be a game changer for the fund in a market that does not steeply go up or moves up gradually or stays sideways or even falls (1/n)
Options is slightly difficult to explain over twitter, so here’s my video on ‘basics of options’, do subscribe to my channel ☺ (2/n)
How does a cover call work?
When a fund buys a stock, they expect it to go up. But they don’t make returns if the stock stays sideways or falls and is exactly where cover call comes into picture. Let me explain, (3/n)
Read 13 tweets
16 Jul
While there is some confusion around MFD & RIA, below is what i gather from the @fpstudycircle meeting today

(1) MF distributors cant charge fees and can only make monies through commissions (1/4)
(2) Individual RIAs (clients less than 150) cant make commission income and can only charge fees. Individual RIAs has to advice direct where ever there is available and commission products are allowed where ever direct not available like corporate FDs etc. (2/4)
(3) Corporate RIA entity can run both fee based & distribution. Depending on the clients requirements the entity can segregate the client 2 fee based or distribution services but cant make money through fees & distribution both 4m the same client. This is client level segregation
Read 4 tweets

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