It is a passive strategy, which tries to follows the weight age of index on a day to day basis. It is usually taken up with the idea of not underperforming the index, without actively handling the same aggressively. This is a follow-up strategy, with the least risk of underperforming the index. A pure bond index strategy may match that of some index that the investor may have chosen as a benchmark. But it may be remembered the same index itself may not necessarily be the one to offer optimal performance.
Typically, the advantages of applying pure bond strategy to manage bonds are that it carries very little or no tracking error compared to the index it follows. Also, the advisory and administrative fee is low and varies from 1 basis point to 20 basis points. The risk exposure remains contained at the level as the index.
However, the disadvantage of pure indexing strategy is that is logistically difficult to implement due to frequent change in strategies demanded. It may prove costly due to regular re-shuffle. It may also offer lesser returns than the index. Total returns depend on the reinvestment rate available on interim cash flows.
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