Continued from Part I
Coming back to the query:
Once you have listed your financial goals and obtained the results of your psychometric test you are now set for product selection.
Let’s start with one of the more popular asset classes which is an important part of any portfolio - DEBT
Low Risk Low return:
This asset class includes investments like bonds, NSCs, Fixed Deposits, Corporate Deposits, PPF, EPF among others. All these products are essentially money given on loan to an entity like the government, govt backed organisations or others like a company and hence the term – debt.
Debt products are characterised by two things – safety of principal and fixed and regular income, hence this class of assets is also called fixed income investments. There is a guarantee to the return of principal –the level of guarantee would depend on the entity that you are giving the loan to – therefore if the debt product is a government bond then it will be more secure than say, a corporate bond. There is a return earned which is usually expressed as a percentage and given out as interest income at periodic intervals.
It forms the bedrock or foundation of any portfolio.
This safety comes at a price and that is mediocre return. While the returns are fixed and guaranteed, they are not high enough to give you the much required edge over inflation and taxation. In the long run to grow your wealth, you need the stimulus that comes through equity investing.
However, irrespective of your goals or your age, a certain portion of your portfolio needs to be in debt as a plausible alternative to volatile equity, forming the base of your portfolio – especially during times of high inflation and high interest rates.
Among debt products, bonds, fixed deposits, G-Secs, NSCs have been around for years and serve your needs of safety and regular income very well.
What is lessor known are the various Advantages that DEBT MUTUAL FUNDS have to offer:
1. You can invest in any of the debt products with an added advantage of returns earned by way of dividends being tax free in your hands and the long term capital gains earned also being subject to indexation, resulting in lower tax outflow as opposed to interest earned on bonds and deposits which are taxable on an accrual basis.
2. There is a wide range of debt funds available to meet different needs - liquid funds, as good alternative to savings bank accounts for short periods like 1 to 3 months; short term funds for 3-6 month time period; income funds and actively managed funds for a medium to long-term horizon i.e 6 months to 24 months.
3. An added advantage Mutual funds offer is also that you can easily switch to and from equity funds especially when you would like to re-balance or realign your investment portfolio.
Duration or holding period.
This will purely depend on your financial goal and/or the present/future market conditions. Some examples:
1.If you have a goal coming up in a year like a holiday, start an SIP in a liquid fund.
2. If you are retired or approaching retirement, a major portion of your portfolio should be in Debt assets.
3. PPF is a superb debt instrument as you already know. Opening PPF accounts for your children will help in their long term financial Goals like Higher education.
If you don’t have an Employees' Provident Fund, then you must invest a good amount in PPF every year.
Important Tips:
Since the debt market in India does not have enough depth yet, it is important to invest in schemes that have larger assets under management (to avoid volatility on account of frequent entries/exits from such schemes by other larger investors) and AAA rated securities.
Stay tuned for more....
Ninad Kamat
CERTIFIED FINANCIAL PLANNERCM
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Image source: livemint.com
Image source: livemint.com
With inputs from Novai Lovlakhi CFP
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