Investment News | A Ladder To Long-term Investment

A straight long-term investment - In fixed income plans of mutual funds, fund managers use the concept of "escalation". How to use a ladder to climb step by step, gradually, this concept is used by fund managers to smooth inputs and outputs that might otherwise have been mixed.

Funds in cash management, such as ultra liquid funds and bond funds in the short term, there are some typical time periods when large repayments, the most important period in mid-March, when the tax prepayments and the need to have cash on the books to show in the balance. Fund managers buy securities in the portfolio with a maturity date in mid-March, so there is no automatic generation of liquidity of the portfolio plan to meet redemptions. It's "Scale" to "keep about as much as planned fund redemptions in securities due to mature at the time.

The argument against this could be that not all liquidity needs can be planned, there could be flows sudden, unexpected cash. To do so, fund managers maintain an estimate or guesstimate of sudden outflows of cash equivalents that is highly liquid securities, beyond that, you can not plan. The aim of scaling is to manage to the extent that it may be as historical events, without affecting the performance objective of the fund generation.

As we see, there are two ways to handle what is first, to keep avenues or cash equivalent scaling it. Keep cash equivalent value can compromise the performance of the fund, therefore, scaling, to the extent possible, the better. Second, if in case of escalation is not met, the regular investment portfolio, ie, with a longer maturity, which are sold in the market, where there is the possibility of being beaten in the mark-to-impact market.

There is important to discuss this practice adopted by fund managers. It can be applied to the management of their personal funds. When you can anticipate and plan an expense that can be invested in fixed income investments with a maturity at the time, so no need for liquidity, both in your bank account or savings deposits. To take a simple example, which provides needed R 2,00,000 education for your child 's six months down the line, Rs 2,00,000 after 12 months and another R 2,00,000 after 18 months. For this you can place three deposits with a bank or a leading company with a maturity of six months, 12 months and 18 months. You will earn a higher interest rate on deposit longer tenure and is sub-optimal to keep the cash equivalent of the avenue, as the savings account.

Source: Global Investment News