In good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place, even though it turned out to be not needed.
– Howard Marks

 

 

 

Every investor scrutinizes the relationship between risk and reward before entering an investment. The risks associated with equity investments are well understood – over time, risks even out, while rewards accumulate. But, what about debt?

Markets work in cycles. People often ignore that debt works this way too. The monetary policy determines the trajectory of interest rates in an economy. Interest rates could trend downwards, bottom out and move upwards again until they peak and begin to descend. The interest rate cycle is what makes debt markets cyclical. Typically, when inflation is benign, and growth looks dull, interest rates are cut to stimulate the economy. On the other hand, when inflation rises and liquidity increases, interest rates are raised to cool the economy. Clearly, the interest rate cycle is linked to economic growth and inflation.

We can expect interest rate cycles to shorten. The RBI has a mandate to target inflation and keep it at 4% (+/- 2%). So, inflation is clearly range bound. In a growing economy like ours, inflation is the key determinant for interest rates. Consequently, even interest rates will be contained within a band.

Playing a shorter cycle requires an altogether different approach and can be quite challenging. Mitigating risk should be at the core of the investment strategy. Constructing a sensible portfolio takes time and involves a significant amount of preparation. The current market scenario may be more favourable to debt investments in terms of the risk-reward metric. Sensible allocation to debt could help construct a well-rounded portfolio.

Our focus has always been on quality. This helps us effectively manage risk. We offer solutions customized to our investor’s risk appetite and investment horizon. Our strategy involves analysing trends in the debt market and taking advantage of market volatility to construct a layered debt portfolio.

Explore your asset allocation options by fixing an appointment with our team.

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