Revisiting my Debt portfolio

This week I decided to do an overall audit of my Debt portfolio. The review was necessitated mainly by the changes in the Small Savings Schemes rates which were brought about. However, it is generally a good idea to do an audit in the beginning of a Financial year to see if any changes are required in the current plan.

As many of the regular readers will know, I have 3 portfolios namely Debt, MF and stocks. In my current state of Financial Independence, the debt portfolio plays a very important role. My main objective here is to get enough regular income out of this so that I do not have to depend on my active income through Consulting for my day to day expenses. As I have no real fresh investments planned for the Debt part, the only other objective is capital appreciation. So, if my Debt portfolio shows some appreciation after the withdrawals I make from it I will be happy enough.

In this post, I am not getting into the rationale of my current investments for the portfolio. Interested readers will need to go through my blog to search for the relevant posts. The audit only looks at what I have and what changes I plan to make.

  • Tax free bonds are about 12.5 % of my debt portfolio. These are bonds from 2013 and carry a coupon rate of 8.8 %. There is no real need to change this and it remains a good part of my interest income in the years to come.
  • PPF forms about 20 % of my debt portfolio. The reduction in rates to 8.1% means that I will now earn significantly less out of this. This will not impact my usage of money as I was not planning to withdraw in the near future. My plan is to keep investing for now and take a call in 2019 when the account reaches the current maturity date.
  • FMP schemes form about 45 % of my debt portfolio. The plan was to use the capital gains from here as my regular use and reinvest the principal. I plan to keep doing the same though the reinvestment will not make sense in FMP now.
  • Other Debt funds form about 12.5 % of my portfolio and the issues here are similar to FMP, as outlined above.
  • POMIS and some FD form the last 10 % of the portfolio and this will be unchanged.

The good thing is my income from Debt portfolio would not have been compromised a great deal. While PPF interest will be lower, FMP and POMIS rates are pretty much locked in and will therefore not reduce in any significant manner. Going forward, the real issue I will have to decide on is how do I redeploy my principal amount redeemed through the FMP maturity. The options I have thought of are Ultra short term funds, Balanced MF, Arbitrage funds and Equity Savings Funds. Each of these have their pros and cons and I need to look at what strategy will involve the minimum risk.

Of course, with the rates likely to decline further over the next couple of years, somer other strategies will probably be needed in my next annual review.

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5 thoughts on “Revisiting my Debt portfolio

  1. Dear Sir,

    I see you have about 45% of you debt into FMP, do you think a person whose retirement is about 20+yrs away should put money in FMP?

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    • For someone whose retirement is 20 years away, FMP will not be the best idea. Try to maximize your PF and PPF first.
      If you have money left which you want to allocate to debt then go in for hybrid funds such as Equity Savings fund, Balanced funds or Arbitrage funds.

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  2. I think Arbitrage funds would be a good idea due to the closeness to the debt, yet the tax efficiency of equity funds. A long term tax free 8.5% return is definitely not a bad idea.

    In your post, you mentioned POMIS is locked in rate. However, in the recent revision, even POMIS was reduced from 8.4% to 7.8%. Wouldn’t this impact even the existing investors?

    From a tax efficiency point of view, POMIS is completely taxable. If such is the case, wouldn’t it make a case for investment in certain corporate FDs like Shriam Transport Finance’s Unnati scheme or some good co-operative banks where interest could be around 11%?

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    • Arbitrage funds will not give 8.5% over a long run, even in a short run it gives much less. POMIS rates are locked in if you invested by March end.
      I am not comfortable with corporate FD as they definitely carry some credit risks. My philosophy is to put all my risks in equity and not debt.

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  3. Hi, I have never been a fan of debt instruments. But as I start reaching my targets, I would have to start rebalancing my portfolio. Among your choices, I would the balanced funds.

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