I have been away to my home town for for 2 weeks on and managed to club my daughter’s convocation as well as a trip to Ajodhya hills in Purulia during this time. Was not able to write my blog in this period and saw that quite a few readers had put their queries on Debt investments. So in this first post after the break, let me try to address this issue in a comprehensive manner.
To begin with, do you need debt at all? If the annualised returns from equity investments are in the range of 12 % and more and you are struggling to get even 7-8 % in Debt investments, then why do you really need to invest in it? Well, the most important reason is that your investment growth with equity normally follows a rather tortuous path. Think of a situation where all your money is in equity and there is a market crash, which reduces your portfolio value by 30-40 % and it takes a long time to recover. In this period you may well have goals coming up such as children’s education etc which cannot be postponed. In such a scenario you will be forced to sell your equity investments at the wrong time. Not only will this have a significant negative impact on the growth but there is also a serious opportunity cost involved. Let me try to explain this with an example :-
- Let us assume I was preparing for my son’s admission into a B school in 2019 and was planning for a portfolio of 22 lacs for the same. I had been doing SIP into 2-3 MF schemes for a long time to achieve this.
- Due to the upsurge in our markets in Jan 2018, the portfolio value had already reached 21 lacs and I was sure that the portfolio will be well above this figure in 2019 March, when I need the money.
- Unfortunately, the market corrected a fair amount already and let me assume that it will correct to -30 % till March 2009.
- My portfolio value will suddenly be 15 lacs only and I need 7 lacs from elsewhere.
- I have 100 lacs in my retirement portfolio and was hoping it will increase to 200 lacs in 6 years @ 12 % annual returns. Wanted to retire in 2024.
- Due to the market downturn, my portfolio for retirement became only 70 lacs by March 2019. On top of it, I also had to take 7 lacs out of it. My retirement portfolio then reduces to only 63 lacs in March 2019.
- Even with a 12 % return now I will never get back to 200 lacs or anywhere close in my retirement – in fact I will have only about 120 lacs.
In case you are thinking that such things cannot happen, let me tell you from personal experience that such occurrences may well happen for 3-4 times in a 30 year period for which many of us normally invest. I myself have gone through 3 such experiences in 2001, 2008 and 2011 which created quite some difficulty for my plans. Fortunately, my asset allocation had the cushion of debt investments and I also did not need the money for any of my goals.
Well, I hope it is now clear as to why you need Debt investments as part of your portfolio. The issue now is where do you invest it and how. As I have covered it in other posts of my blog, I am only presenting the solution here, rather than giving a full explanation.
- For all salaried people, PF is a must and you need to make sure that you do not withdraw from it. Keep it only for your retirement.
- For all others a PPF account is a must. In fact, I will say the salaried people should have one too and others can have one for their spouse as well.
- If you have a daughter then you can go for SSY as well.
- Retired people or ones looking at regular income can look at Tax Free Bonds and Senior Citizen’s Savings Scheme along with Vaya Vandana Yojana.
- Others can look at short term debt funds and also Hybrid type funds such as MIP and Equity Savings Funds.
- Finally, you can look at long term Gilt funds if your time horizon is really long.
What about the asset allocation? Well, if you are working with an active income you can keep Debt to Equity at 35:65. For people in the FI state it can be 45:55, for retired people 55:45 and for senior citizens above 70 it should be 70:30. Remember that you will definitely need both equity and debt at all stages of your life, unless you have way more assets than you will ever need.
Whichever way you look at it, Debt investments are critical to your financial well being.