How you can decide on the sort of debt portfolio you need to have, based on your risk profile
The increasing awareness on asset allocation has changed a few things in the last couple of years in the financial services market. It has also thrown open a number of products such as fixed maturity plans, mezzanine debt, structured products, and some even offering portfolio management services in the debt category.
While debt instruments like fixed deposits (FDs) have been man's best friend for decades, their importance today has a different meaning. It is no more a case of parking savings in an FD. The instrument is expected to be chosen according to period of investment and the risk profile of the investor. That is surely a vast change from earlier days.
Since there is a higher responsibility on the choice of product, it is imperative for an investor to choose the instrument carefully. Since debt too can have volatility and faces the risk of capital erosion in the short term, you need to opt for an allocation strategy based on various parameters.
Here are some tips to choose debt instruments well:
Focus on period
Debt should be a natural choice when the period of investment is short. While short-term could be any period ranging from one month to one year, it is ideal to park money in debt when the tenure is less than one year. Besides fixed deposits, you can also look at other options like short-term debt funds and fixed maturity plans if liquidity is not an issue.
Debt for the sake of comfort
There are many who bet on debt irrespective of the tenure. Interestingly, such investors haven't lost out much in the last couple of quarters as debt funds have managed to offer decent returns. Even liquid funds have been churning out annualised returns in the range of over five percent in recent times. The interesting point is that debt, like other asset classes, is going through a shorter lifecycle in the recent times and is proving to be the best bet in tough times.
For those who hate the volatility of other assets such as equity, this can be a choice for all times.
Debt as a parking asset
In the recent times, the role of debt has acquired a different meaning with investors using it to park their profits to tide over volatile periods. This has been the case with equity and even commodities to some extent. Such investors need to choose the product in debt carefully as exit costs need to be factored in.
For instance, a fixed maturity plan may not be the best option as they don't offer flexibility if an investor uses debt for re-entry into equity during price corrections. Similarly, a monthly income plan or a short-term debt fund could prove unfit as both have exit loads and carry a limited risk in the short term.
Debt for longer period of time?
It is not a bad question though debt products have been beaten down often on the basis that they are not a good hedge against inflation. Interestingly, if you were to take a 10-year view of debt, the performance has not been too bad and over a longer period of 15-20 years, they have managed to close the gap with other assets like equity. However, you need to get the timing and maturity of the product right as they play a crucial role in the overall performance.
More importantly, allocation to debt should be driven by your needs and risk profile. When the corpus is large and if you are done with asset allocation, you need not worry about the returns aspect.
