Fixed income portfolio

Not every portfolio chases growth. A fixed income portfolio is built from securities that promise a defined stream of coupon payments and a return of principal at maturity — debt, not ownership.

Because the cash flows are contracted rather than discretionary, fixed income returns are more predictable than equity returns. That predictability is exactly why large, cautious pools of money — pension funds, insurance companies, banks and sovereign funds — keep a large share of their assets in this form, and why fixed income markets globally dwarf equity markets in size.

Section 19.1 defines it directly: when a portfolio is constructed with securities belonging to the category of fixed income securities, it is called a fixed income portfolio. The workbook's own list of examples: Government Securities, Corporate Bonds, Debentures, Commercial Papers, Certificates of Deposit, Treasury Bills and Tri Party Repos (TREPS).

Governments are described as the largest borrowers globally through fixed income markets, with the funds raised spent on roads, power, defence, ports, education, healthcare and agriculture — so fixed income markets are framed as contributing directly to economic growth and welfare, not merely as a parking place for cautious money.

The generic classification of fixed income strategies mirrors equity strategies (passive versus active) but differs in the detail, because the nature of a bond — a maturity date, a coupon, a credit rating — is different from a share. Section 19.6 lists the risks a fixed income portfolio carries: interest rate risk, credit default risk, liquidity risk, reinvestment risk, market risk and currency risk, with the portfolio manager judging which of these to hedge and which to accept, particularly when performance is judged on a relative basis.

Illustrative figures. A conservative PMS client allocates Rs 75,00,000 to a fixed income mandate. The manager builds the portfolio as follows:

Across this mix the manager is managing interest rate risk (mainly from the 10-year G-Sec and corporate bonds), credit risk (from the corporate bonds, CDs and commercial paper, absent from the sovereign G-Sec), and reinvestment risk (from the short-tenor T-Bills and commercial paper, which mature and must be reinvested at whatever rate then prevails). None of the Rs 75,00,000 is in equity, so the client's return depends entirely on coupon income, reinvestment and any price movement in the traded instruments — not on company earnings growth.

Chapter 19 (Fixed Income Portfolio Management Strategies), section 19.1, opens the chapter with this definition and instrument list, before splitting into the passive strategies (buy and hold, indexing, immunization) and active strategies (interest-rate driven, credit analysis) that fill the rest of the chapter. Expect a question naming a security and asking whether it counts among fixed income instruments, and one listing the six risks from section 19.6.

• Fixed income does not mean risk-free — only sovereign government securities are treated as free of credit risk; corporate bonds, CDs and commercial paper all carry issuer credit risk.
• The six risks in section 19.6 — interest rate, credit default, liquidity, reinvestment, market and currency — are not all present in every fixed income holding. A pure G-Sec portfolio, for instance, carries no credit risk.
• "Predictable" describes the contracted cash flows, not the market price along the way — a fixed income portfolio's mark-to-market value still moves with interest rates and credit spreads before maturity.
• TREPS (Tri Party Repos) is money market paper, distinct from a term deposit or a bond — it is explicitly named in the workbook's own instrument list and is often left out of a candidate's recalled list.