As life brings new commitments and aspirations, the way you approach investing needs to adapt. For fixed income investors, this goes beyond chasing the highest yields. Their focus is: Building a robust portfolio that offers the flexibility to achieve your life goals.
This often happens amid the constant distraction of social media, group chats, and market noise, which can tempt investors from sticking to a well-defined investment strategy.
Adopting a simple, reliable framework helps fixed income investors to stay invested confidently, without watching markets 24/7 or chasing every headline.
How can Duration Build Resilience When Rates Move
Beyond yield and credit quality, duration is another key factor for fixed income investors. It measures how sensitive a bond or bond fund’s price is to changes in interest rates.
Why it matters for you:
If you use investment financing or hold longer duration funds, price swings due to interest rate changes can be magnified. A significant drop in the value of your bond holdings could trigger margin calls or lead to substantial losses, particularly with leveraged financing.
Quick illustration:
Bond Type | Impact of 0.5% rate rise | Why? |
|---|---|---|
2-year bond | Smaller price drop | With a shorter duration, you can reinvest at higher rates sooner. |
10-year bond | Larger price drop | With a longer duration, you’re locked into lower coupons for longer. |
While direct bonds and bond funds are primary considerations, if you’re looking for higher yields, be aware that these often come with additional risks:
- Mortgage-backed securities: These involve more complex structures and carry prepayment risk.
- Private credit: This is typically less liquid and perceived to have higher risk.
How does FX Hedging Stabilise your returns from Currency Moves
The foreign exchange market is dynamic, but fixed income investors often prioritise predictable returns, especially when it comes to income generation. Considering SGD-hedged unit trusts, for example, allows you to invest globally without needing to predict currency movements.
How it works:
When you invest in an SGD-hedged share class of a fund comprising USD-denominated bonds, the fund uses FX forwards to offset USD/SGD fluctuations. This strategy comes with a cost, which affects your overall yields and returns, but it effectively removes direct exposure to USD currency risk.
Example:
SGD-hedged share classes generally show lower distribution yields and/or returns vs the unhedged funds due to these hedging costs. However, you avoid taking on USD currency risk altogether.
| How do you identify a hedged vs an unhedged share class? | |
|---|---|
Unhedged Share Class | Hedged Share Class |
Fund name typically doesn’t mention hedging | Clearly labelled with “hedged” in the name |
Example: | Example: |
Why is Staying Diversified Essential to Get the Mix Right
Just as market movements can alter your portfolio, a lack of diversification can leave you overly exposed. While your primary focus may be on income from bond investments, spreading your investments across various asset classes (such as stocks and alternatives), sectors, and geographic regions, can lead to steadier risk-adjusted returns over time.
Furthermore, income investing is not a substitute for growth. The risk of focusing solely on income might lead you to miss out on longer-term opportunities.
Why diversification matters for fixed income investors:
- Reduces over-reliance on a single source of return: The objective of diversification is not to completely eliminate risk, but to ensure your portfolio isn't overly dependent on any one type of return. This provides greater stability across various market conditions.
- Complements income with growth: A balanced portfolio effectively combines income-generating assets with growth investments. This strategy allows returns to be generated through both consistent payouts from your fixed income holdings and potential capital appreciation from growth assets over time.
Final Thoughts
At this stage of life, your investments are the engine behind the choices you want to make. A straightforward framework helps you stay focused, even when markets feel noisy. With the right tools and guidance, you can build a portfolio that grows through cycles, supports your lifestyle, and gives you the flexibility to pursue what matters most to you.
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