Planning to invest in debt? Here is how to structure your exposure

How to invest in debt

When other asset classes appear overheated or in risky zone or you want regular income, the best investment is to put your money in fixed income or debt instruments.

However, a debt-instrument heavy investment portfolio is not always a healthy one since it would pull down the overall returns. If one hopes to beat inflation by a reasonable margin, one has to have a diversified portfolio with a fair sprinkling of equities, equity funds and commodities.

So how much of this instrument is good in a normal investment portfolio and what should be the holding period? “ These instruments should generally be used for short-horizon investments (less than 5 years). For investments beyond 5 years, equities/equity mutual funds are superior since they offer better returns over the long term and beat inflation,” says Ramganesh Iyer, Co-Founder, Fisdom.

Some of the more preferred fixed income instruments are bank fixed deposits, fixed maturity plans, non-convertible debentures, debt funds, bonds or bond funds and gilt funds.

Also Read: Market Rally and the Festive Season. Truth, Tradition and Tale.

When one is young and has higher risk-taking abilties one should choose to have higher exposure to equties which should gradually be trimmed down in favor of debt to ensure a less volatile portfolio. Having too much exposure to equity at the time of retirement would make the portfolio open to erosion in case of slump in the capital markets.

Anil Rego, CEO & Founder, Right Horizons says that the composition of debt in one’s portfolio should be determined by the investor’s risk appetite. “How much debt one should hold and in which debt instruments will vary and depend on the investors risk profile,” says Rego.

For better understanding, Anil Rego gives the following sample asset allocation with a balanced mixture of different financial instruments present:

Debt and other asset class allocation

Source: Financial Express

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