Fixed income solutions form a core part of the investment portfolio for all conservative and moderate investors. They yield steady returns and are unaffected by stock market volatility. Investors may seek fixed income solutions other than fixed deposits to realise better returns on their capital invested. Fixed income solutions also provide great tax benefits to investors in the form of indexation (i.e. adjusting the cost of purchase to accommodate for inflation before calculating long term capital gains).
At prosperity wealth management we understand the requirements of our clients and build comprehensive fixed income portfolios comprising of sovereign government bonds, debt mutual funds, direct corporate debentures, company deposits, treasury bills and other liquid instruments.
While fixed income solutions are significantly less volatile & steady income bearing alternatives to other capital market securities, at prosperity wealth management we understand the underlying mechanics & inherent risks involved in these products and how to mitigate them in our portfolios.
While evaluating fixed income products we consider the yield to maturity, average maturity, modified duration & credit quality. We also review ratings given on debt quality by CARE, CRISIL, ICRAA & IND R&R in addition to independently reviewing the financials of a corporate. This helps us in quantifying and mitigating the various risks listed below.
Interest rate risk – It is the risk of fall in bond prices to match the prevailing yield in the secondary markets. It is affected by the repo rate set by the Reserve Bank of India. A decrease in the interest rates causes a rise in the bond prices bringing up the overall yield to maturity and vice-versa.
Credit risk – It is the most prominent risk in fixed income products. It is the risk of a corporate not being able to pay up its debt obligations also known as default risk. This primarily depends on the strength of a company’s balance sheet and its management ethics.
Inflation risk – Inflation or the loss of purchasing power is often overlooked while calculation returns. It is important to set bench marks for fixed income solutions and monitor their performance against set bench marks.
Re-investment risk – It is the risk of not being able to re-invest the accrued interest payments at the same rate at which the principle is invested resulting in a loss of compounding.
To build a portfolio of fixed income products that yields better returns than a standard savings account or a fixed deposit account contact us here.