Strategic Vs Tactical Allocation

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.

For purposes of understanding this concept of matching your time horizon with the portfolio maturity of the fund, as an illustration, the maturity in liquid funds is less than three months and you can invest in such funds for a time horizon of one week to 2-3 months. Likewise for ultra-short-term funds, where you can park your money for 3-6 months, as they mature in 3-6 months.

At the other end of the spectrum, there are gilt funds. The portfolio maturity in government security (G-sec) funds is the longest; and, therefore, your horizon should be at least five years, preferably 10 years. The portfolio maturity of the debt fund you are looking at, can be found in the monthly factsheets, which are published every month, on the website of mutual funds.

Tactical Allocation

The concept of tactical allocation can be defined as marginally increasing or decreasing the allocation to an asset class that is equity or debt, according to the prevailing market conditions. Market condition, in the case of equity, refers to valuation levels. In case of debt, it means expected movement of interest rates and prevailing yield levels. Prevailing yield level means the yield levels on various bonds or instruments in the market at that point of time.

Bullish view or positive view on interest rates implies interest rates or yield levels coming down; bond yields and prices move inversely. If the call comes correct, you benefit as prices of your existing holdings move up. Bearish view is when interest rates are expected to move up; you may pare your debt exposure at the margin. Sometimes, there are mispricings and yield levels on certain instruments may be attractive. That makes a case of increasing your allocation a little bit.

Current Situation

Yield level on government bonds have moved up, even after the Reserve Bank of India (RBI) reduced the repo rate by 1 percentage point. The 10-year benchmark G-sec yield has moved from 6.25 per cent in May 2025 to 6.50 per cent now. Yield on longer-dated G-secs, say 20- or 30-year maturity, have moved up much more over the last few months than shorter-dated ones, say, those with 1-year maturity.

The salient aspect of the current situation is yield on state G-secs or state development loans (SDLs). Though G-secs are sovereign instruments, yield levels on SDLs are higher than that on central G-secs, as the fiscal profile of states are weaker than that of the Centre. Nonetheless, the yield level of state G-secs are usually lower than AAA-rated corporate bonds, as these are sovereign at the end of the day.

Currently, due to some technical reason, yields on SDLs have moved up. These are even higher than those of good quality AAA-rated corporate bonds. This is a mispricing you can avail of.

Yields on corporate bonds have inched up recently, again due to technical reasons. Hence if you are entering corporate bonds now, you have a relatively better entry level than a few months ago.

RBI Forward View

The rate cut cycle of seems to have come to an end; there is a small chance of one last rate cut if inflation gives a positive surprise. From that perspective, there is not much expectation of a rally in bond prices. However, yields can potentially trace back on the back of a sudden positive news flow or some technical reason. Any way, if your yield level at the time of entry is relatively higher, you are that much better off.

Methods Of Entry

There are multiple ways in which you can take exposure; directly or through an investment vehicle. For direct investment in G-secs, there is RBI Retail Direct platform, through which you can invest both in central and state G-secs. This facility is available only to individuals. You just have to open your account there, the rest of the process requirements (demat, banking etc.) are taken care of by RBI itself. For direct entry into corporate bonds, there are Online Bond Platform Providers (OBPPs), who make their inventory of bonds available on their website.

Also, there are investment vehicles like mutual funds (MFs), portfolio management services (PMSs) and alternative investment funds (AIFs). The more popular vehicle is MFs, due to low ticket size, accessibility and liquidity. The particular mispricing opportunity mentioned earlier—SDL —can be availed of either directly through RBI Retail Direct or through MFs. If you want liquidity, MFs are better; you have to identify the particular funds that have exposure to SDLs. There are also target maturity funds that have exposure to SDLs, and certain other funds with SDL-oriented portfolio.

By Joydeep Sen, Corporate Trainer and Author