Imagine a giant ice cream cone - scoops of different flavours, balanced one on top of the other. You did a lot of tasting, tried out new flavours - liked a few, not so much the others, developed preferences; there's a whole process of experimenting and gathering knowledge that you went through to know what suited you and you are still trying out new tastes!
The ice cream cone is your portfolio; and the different scoops are the asset classes which make up your portfolio. How do you decide which asset class to go with, in what combination, proportion, timing etc.?
So here's a ready reckoner on various asset classes, their attributes, suitability etc. to help you decide and select which would be better for you and very importantly in what proportion.
Assets can be classified broadly into real or physical assets like property, land, gold, silver, and personal assets which are meant for personal use and consumption like your house that you live in, the car, bike or vehicles that you drive, jewellery meant for wear, electronic gadgets etc; and paper assets or financial assets like PPF, Insurance, Shares,
Mutual Funds,
Bonds, Fixed Deposits etc.
Within each of these two categories, individual assets with similar characteristics can be further grouped together to form an asset class.
Let's start with one of the more popular classes which is an important part of any portfolio - DEBT
This asset class includes investments like bonds,
NSCs,
Fixed Deposits,
Corporate Deposits,
PPF, EPF amongst others. All these products are essentially money given on loan to an entity like the government, govt backed organisations or others like a company and hence the nomenclature - debt.
Debt products are characterised by two things - safety of principal and fixed and regular income. There is a guarantee to the return of principal - the level of guarantee would depend on the entity that you are giving the loan to - therefore if the debt product is a government bond then it will be more secure than say, a corporate bond. There is a return earned which is usually expressed as a percentage and given out as interest income at periodic intervals. As a result this class of assets is also called fixed income investments.
The safety, certainty and stability element of this asset class gives it the potential to cushion your portfolio from adverse market reactions. It forms the bedrock or foundation of any portfolio and is an integral part of it.
This safety comes at a price and that is mediocre return. While the returns are fixed and guaranteed, they are not high enough to give you that edge over inflation and taxation. In the long run to grow your wealth, you need the stimulus that comes through equity or real estate investing.
However, irrespective of your goals or your age, a certain portion of your portfolio needs to be in debt as a plausible alternative to volatile equity, forming the base of your portfolio - especially during high inflation and high interest rates.
Among debt products, bonds, fixed deposits, G-Secs, NSCs have been around for years and serve well the needs of safety and regular income. What is lessor known are the advantages that
DEBT MUTUAL FUNDS have to offer. Through the mutual fund route, you can invest in any of the debt products with an added advantage of returns earned by way of dividends being tax free in your hands as opposed to interest earned on bonds and deposits which are taxable.
There is a wide range of debt funds available to meet different needs - liquid funds, as good alternative to savings bank accounts for short periods like 1 to 3 months; short term funds for 3-6 month time period; income funds and actively managed funds for a medium to long-term horizoni.e 6 months to 24 months.
The factors that you need to consider for selecting the right debt fund are;- Duration or time horizon. That is, for how long you are committing to invest the funds and depending on this, you need to choose the right type of fund - liquid, Short term, Income, FMP or actively managed funds.
- AUMs of the scheme. i.e. the total investment of a particular scheme. Since the debt market in India does not have enough depth yet,it is important to invest in schemes that have larger AUM.This will avoid volatility on account of frequent entries/exits from such schemes by other larger investors.
- Expense ratios of the scheme play a vital role in determining investor returns.
Some pointers that you could use to create a portfolio of debt instruments.1. Set aside 2-3 months of regular expenses in a liquid fund as an alternative to idle money in a savings bank account.
2. If you have a goal coming up in a year like a holiday, start as SIP in a liquid fund.
3. Any goals coming up within the next two years, set aside that money in debt funds to keep it safe.
4. Retired or approaching retirement, a major portion of your portfolio should be in Debt assets.
5. Select debt funds that invest in AAA rated securities
