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.