Your choice of debt instruments

Now that we are clear about the parameters we need to consider for selection of a Debt instrument, let us look at the possible debt instruments you can probably choose for 2016 and beyond. It is important to remember that even for debt instruments, long term is key.

To begin with, let us start by the obvious instruments you must have in your portfolio namely PF and PPF. Use PF specifically for your retirement kitty. This means you must continue your PF across changing jobs and never think of withdrawing it. We all talk of the wonder that compounding is and there is no better instrument than PF to demonstrate this effectively. PPF is something you should have started really early in your career and it needs to be continued till you need the money. You must also contribute maximum to it. In case you do it properly, by the time your financial goals like children’s education comer up you will have a perfect backup for your equity portfolio. This will ensure, you do not need to redeem your equity investments in a down market.

The rates will of course reduce for both of these over 2016 and maybe beyond that. However, both of these are great instruments and the tax exemption offered to them, along with the discipline they bring into your savings, make them a must have in your debt portfolio.

So far so good but what next? Well, if you have enough surplus money I would recommend opening a PPF account for your spouse also. However, for those of you who have a girl child, younger than 10 years Sukanya Samriddhi Yojana is the way to go. SSY is a great product offering a higher interest than PPF, with all the other benefits. It is an ideal investment for your daughter’s college education. And, if you are funding her college education through equity, it can be used for a variety of other needs she will have later on.

What about Fixed Deposits? Well, with the rates plummeting and the returns being taxable, they just do not make sense to me. If you are looking at it for your retirement income then look at Senior Citizen’s Tax Saver scheme. Even the Post Office MIS is currently giving 8.4 % even though it will probably change any day now.

I have written some posts on Tax free bonds in the blog and believe that under current circumstances it will be a very pragmatic investment. The pre-tax returns of any other instrument will have to be is  double digits to match 7.6 % tax free returns of these bonds and I seriously doubt we will get back to those realms of debt return any time soon. Some of you wanted to know if you could buy the earlier 2013 editions in the secondary market. Those bonds are quoting at a significant premium now, so I really do not think it will be a good idea to do so.

What about other Debt mutual funds? Let us look at them one by one:-

  1. Monthly Income Schemes : I am a great believer of keeping Debt and Equity separate so I will avoid these.
  2. Liquid Funds : You may use it to park your money for the short term, with rates coming down, returns from these will not be great.
  3. FMP : The charm has reduced due to LTCG indexation after 3 years as well as lower potential returns. If you still want to invest do so only for 3 year FMP and in the next 2-3 months when rates are still reasonable.
  4. Short term funds : May benefit through further cuts in interest rate but my preference will be for more certain returns.
  5. Gilt funds etc : In one word, avoidable.

There are other options in the debt universe but I think you will find most of your money well invested if you try the above.

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20 thoughts on “Your choice of debt instruments

  1. Why not gilt funds please? Principal is safe and with prospects of lower interest rates they are ideal
    investment options.Have you seen the performance of SBI Gilt Fund Short Term please?What is your opinion?

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  2. Thank you for enlightening us with these posts. It’s been a privilege reading through them all!

    One thought on PPF + SSY is:
    I have seen people open SSY as soon as the government opened it.
    But, they don’t utilize it to the max. When I asked them if they have PPF and if they fund it to the max the answer was no. They deposit a very small sum to keep it alive. In that case, how will it help opening so many debt accounts if you are not utilizing them.

    The main takeaway from this article and in general is:
    If you are opening PPF for you, your spouse and an SSY for < 10-year-old girl child do it only if you can invest 1.5 + 1.5 + 1.5 = 4.5L in a year.
    If anyway you are planning to invest 10000 in each or some such amount then it may not help much in your overall goals!

    It may so happen that for some years in between they may not be able to contribute full and end up contributing say 1L or 50k in each which is OK. But, underutilizing the schemes will not take you anywhere!

    Let me know your thoughts.

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    • Thank you for the nice words. I agree with you on the need to contribute meaningfully to the investments every year. If money supply is an issue look at 1 PPF and 1 SSY account to contribute fully each year.

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  3. This is really a good article with clear insights into paths to treat. There is one avenue specifically available to certain individuals. Some companies allow their employees to contribute to the PF voluntarily. This is otherwise termed as VPF (Voluntary PF) contribution. I am not 100% sure, but I think the cap is that an individual can contribute upto 100% basic as PF.

    The main advantage of this is that there is no 1.5 Lakh limit like PPF and allows them to contribute more towards their retirement kitty. I am currently contributing an additional 12% over and above my normal PF for 2 years and am very happy to share that the kitty looks much better than it did earlier. The flip side of this is that the current disposable (in-hand) income reduces, but on the longer horizon would wonders for you. Short term pain for long term gain…

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  4. Sir,

    Just started with SIP with Rs 1000. I am already using RD/PPF (full quota) for last 7 yrs. Started with a large cap ICICI Prudential Focused Bluechip Equity Fund with 1.5 yrs (will extend it after 1.5 yrs mostly).I am also thinking to open demat account to buy shares (not active trading).whats your view ? Should I select more SIP funds to balance portfolio?

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  5. Sir,

    I am having 3-to 5 years or even more period to invest and looking for some sort of stable income hence I am considering the Birla Sunlife Dynamic bond fund Direct dividend payout options? I am satisfied with dividend yield of 7% to 9%tax free. Pl share your comments.

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  6. Sir,

    SSY maturity is 21 yrs from date of account opening, irrespective of age.With that scenario if the child is aged more than 5 years, it seems less attractive to make use at education or marriage.Of course partial withdrawal is allowed at age of 18.
    As for POMIS, future reduction in interest rates are automatically applicable or current rates can be locked.

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    • Maturity of SSY is when daughter reaches the age of 21, not after 21 years from starting account. Also, you can withdraw up to 50% when your daughter reaches 18 years, which can fund her college education. POMIS rates are 8.4% now and they can be locked for 5 years.

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      • SSY maturity is ”Deposit under scheme will mature 21 year after opening of the account”, 21 years from opening account, not age of child.

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