Navigating the world of fixed income investments

When it comes to investing in fixed income, finding the right balance between generating returns and managing risk is crucial. How do experts tackle this challenge and how does this impact everyday investors? Let’s explore! 

Understanding risk and rewards

Managing investments involves understanding how much risk you can handle and whether the returns you’re getting make it worthwhile. One investment management tool is the GIMS framework. The GIMS framework is an acronym for Gate, Investments, Monitoring and Surveillance. This framework defines the guardrails on key risk parameters for the funds’ investments to aid investors in optimising returns to achieve their financial goals.

During the Gating process, a team of research analysts evaluates the quality of the investments available before onboarding them. They look at the probability of stress in these investments and their ability to withstand unpredictable situations. During the investing process, fund managers select portfolios that have a reasonable chance of generating returns while controlling risk. Regular surveillance along with independent monitoring of the portfolio is carried out to take corrective actions in case of any adverse development in the portfolio. 

Dealing with interest rates

We expect that inflation in 2024 will remain in a declining trajectory compared to 2022 and 2023. However, the rate cuts cycle is expected to be a modest one, with a base of 50-75 bps rate cuts, as growth remains robust. Hence, the current high rates create a suitable opportunity for patient investors to experience high accrual as well as the possibility of participating in capital gains as the rate cycle turns in funds having a moderate duration of one to four years.

Deciding how much of your money to put in different types of investments—like bonds and stocks—depends on what you want to achieve and how much risk you can handle. It’s important to understand your comfort level with risk before you start investing. Instead of chasing after investments that promise maximum returns, take the time to think about what you’re comfortable with.

Finally, let’s talk about credit spreads. These are like the extra money you get for taking on a bit more risk by investing in certain bonds that may have a risk of default instead of government bonds. Hence investors need to assess whether they are being adequately remunerated for the default risk that they are undertaking. Currently, the spread or difference between high-quality and weaker-quality bonds is lesser than historical spreads and hence high-quality portfolios make a stronger investment case.

In the end, managing your investments is about balancing risks and rewards. By using smart strategies and understanding your own goals, you can make the most of your money while keeping things steady in your fixed-income investments.

(The author is Head of Fixed Income, UTI AMC)