Strategic Vs Tactical Allocation

Fixed-income investments can be bucketed based on your time horizon. However, you can also tweak the allocation, tactically, in accordance with the market conditions

- By JOYDEEP SEN

The unique selling point (USP) of the fixed-income portion of any portfolio is stability; it leads to better risk-adjusted returns. The allocation to it depends on one's investment objectives, risk appetite, and investment horizon. The allocation may be on the lower side, say 20 per cent, for young investors with a long horizon, or on the higher side, 80 per cent, for retired senior citizens. That is the strategic allocation to fixed income.

Tactical allocation is tweaking the allocation a little higher or lower in accordance with the market situation. Sometimes, there is a mispricing in the market or there is a certain view on interest rate movement, based on which one can tweak his/her allocation.

Strategic Allocation

There is a structure in fixed-income investments, with the help of which one can dovetail one's investments according to one's cash flow. Bonds have a defined maturity, which is not the case with equity stocks. Upon maturity, you get the contracted amount, irrespective of market movement at that point of time. When you are investing in a bond of say, 2-year and 5-year maturity, because you need cash flow after two years and five years, it is called laddering. Essentially, you are constructing a portfolio with bonds of various maturities to suit your requirements.

Laddering can be done through mutual funds as well. In an open-ended mutual fund scheme, the fund is perpetual, unlike in the case of bonds. However, there is a portfolio maturity of the fund, which is the weighted average maturity of all the bonds and/or instruments in the portfolio. The portfolio maturity of the fund gives you a ballpark idea on the appropriate investment horizon. There are 16 debt fund categories as defined by the Securities and Exchange Board of India (Sebi). All these funds have their portfolio maturity range either as defined by Sebi or as mandated by the asset management company (AMC) within the guidelines.