10th February 2012

WF : How can fixed income instruments create wealth for an investor?

Lakshmi : Wealth creation through fixed income investments is possible; albeit, the gains over the long term period may be relatively modest. Nonetheless, many conservative pension and retirement funds maintain a portfolio of long term fixed income securities, for this very purpose.

However, if an investor has a risk appetite and a long term investment horizon, equities can be considered as an option, since they tend to provide a better potential for wealth creation.

WF : What is the role of fixed income instruments in an investment portfolio?

Lakshmi : The key role of fixed income asset in an investment portfolio is largely to provide a regularity of income inflow, as also to provide a degree of stability to the portfolio. However, many fixed income portfolios, especially the long duration ones, tend to provide modest capital appreciation from time to time, and have it as one of their objectives.

WF : What is the importance of FMP and debt Income funds in an investor's fixed income portfolio?

Lakshmi : FMPs tend to be passively managed close-ended portfolios; wherein the underlying securities mature largely in-line with the scheme itself. This helps to lock-in and realize the full YTM available on those securities. Consequently, due to reduced risk and an almost sure return, the allocation in FMPs provide a strong grounding to the overall portfolio.

On the other hand, income funds not only seek to garner higher accruals; but also strive to generate better return opportunities by actively participating in the debt market.

WF : How can FMP's and debt income funds be aligned to individual goals?

Lakshmi : Yes indeed. FMP schemes can be utilized to provide strength and stability as they help mitigating interest risk to a large extent for the investor. Liquid funds can be used to generate marginally higher returns than otherwise available on regular cash flows. Whereas, duration funds can be invested with a long term objective of providing relative stability to the portfolio while also position the investor for potentially modest capital gains, especially in a favorable interest rate scenario.

WF : What is your message to investors who seek investments in fixed income products?

Lakshmi : Fixed income offers investment solutions for most macro economic conditions. For eg. In a rising interest scenario, investments could be skewed towards FMPs, while in an anticipated declining interest rate scenario, one could look at duration strategies. One thing needs mention " in fixed income, one doesn't lose capital (unless there is a credit default)" . Hence investors should look at meaningful asset allocation towards fixed income.