When it comes to the typical observer, investing in bonds seems very simple, and the general rule here is to buy a bond that gives you the highest yield. This approach does work with a certificate of deposit with any native finance institution; however, it is not as simple as you think in real life. If you go deeper into restructuring the portfolio of your bond holdings, you will find several options available. Each of them has its pros and cons; however, four strategies are deployed for the management of bond portfolios, and they are the purchase and maintain, also known as the passive technique, the index bond matching or the quasi-passive technique, the immunization technique or the quasi-lively methods, and the devoted and enthusiastic technique.
Kavan Choksi – An overview of the passive bond management technique
Kavan Choksi is an expert in investments and monetary administration and an esteemed entrepreneur. When it comes to these four methods of bond management strategies, he advises that you should continuously be educated about them before you incorporate them into your needs. Each of them functions in its way, and if you embrace the first strategy, the passive bond management technique, you can maximize the income-generating property of the bonds you hold. He advises that one should proceed only after studying the strategies. Unless you know about them you will not be able to overcome the challenges involved and proceed further.
What is the crucial premise of this strategy for bond portfolio management?
The principle of this strategy is that bonds are safe and predictable income sources for you. The premise of buys and hold entails purchasing individual bonds and keeping them till maturity. The cash flow from the bonds you get can be used to fund the external income needs or reinvest them back in the portfolio or other asset classes or bonds.
No assumptions are made in this strategy
You can initially buy the bond at a discount or premium, assuming you will receive the total income when it matures. The sole variation in its total return that comes from the original yield of the coupon is the reinvestments of the above coupons as they take place. Business expert Kavan Choksi says that in the passive strategy, there are hardly any assumptions about the direction of the interest rates in the future and whether there is any change in the present value of the bond because the yield shifts are not significant.
On the surface level, you might think that this style of investing is sluggish; however, in real life, the passive bond management strategy gives you an anchor with the rough financial storms in the market. At the same time, this strategy also eliminates the costs of transactions. The main reason for the above stability is these passive strategies work well with non-callable and high-quality bonds like municipal, government, or investment-grade corporate bonds. If they are incorporated initially during high-interest rates, they can also outperform the other active strategies.
