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  • Writer's pictureSahastha

Debt – Anchor of your portfolio

Updated: Oct 4, 2023

Debt is anchor of your portfolio. It reduces the overall volatility and should give returns very close to what is assumed. Lots of misunderstanding and lack of knowledge is there, when it comes to completing the debt allocation of the portfolio. Wrong notion of liquidity is being attached to the debt investment and mutual funds are being sold left and right by the very people you follow on blogs and social media.

Why do you need liquidity? Some people argue, being in a locked instrument doesn’t allow you to rebalance the portfolio when asset allocation deviates considerably from the original point. Yes but being neck to neck in asset allocation is never a good strategy. Equity portion of the portfolio needs to be flexible with additional cash resources to capitalize the unique opportunity market throws at you. In the name of liquidity people are being fooled and mutual funds are being sold left and right be it equity, debt or gold. The same liquidity hurt investors in franklin funds and it will hurt again in some other fund in near future.

What are the alternatives

“For those who were aware took the advantage in the past which is not available in present.”

RBI 7.75% (fixed) Govt Bond – 7 year lock in with option of getting principal+interest at the end of tenure with fixed rate of return for entire duration. Yes it will attract tax but so will the FD which is giving you 5% now. Things have changed post pandemic, rates came down to 7.15% with additional clause of revising the rate every 6 months which is a possible further reduction of the rate.

Various Tax free Bond of PSU – Available in secondary market, can be bought and sold without any lock in and gives a flat tax free rate of return. People ignored and the aware (including us) took the advantage by booking 6% tax free return pre pandemic.

Post office saving schemes – PPF, SCSS are two notifiable schemes from the post office. SCSS for senior citizen gave a return of 8.6% payable in every 3 months. PPF which was giving 7.9% tax free return pre pandemic is still very lucrative with 7.1% tax free return in current climate.

EPF/VPF – It should be the core of your debt portfolio and in my view you should save as much as possible in EPF via VPF. 8.5% rate of return with a quite a big political clout on it’s interest rate, you won’t see it going down as drastically as PPF or SCSS or RBI bonds.

In expensive equity market, its suggested to stop the flow towards equity funds and increase the VPF contribution to fulfil the debt allocation of the portfolio. It’s only possible if you have very good control over the equity allocation and can reduce and increase the same at your will. So, this is not possible for DIY or a general financial planner following a basic service of passive asset allocation.

Can I use liquid funds for Debt allocation?

In current climate I will not touch liquid/debt funds even with a 10 foot pole. We have already fulfilled the allocation of debt for our clients in various investment schemes mentioned above. We have used debt funds in past but we came out well before it can hurt or lock our money for unforeseeable future with very less information of the amount which will be back. So, I will not suggest liquid funds for debt allocation. You don’t need so much liquidity from your debt allocation. What you need is considerable safety and reasonable returns. So do your due diligence with proper research and don’t fall in the trap of herd mentality.

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