Equity and debt are two asset classes that can form an investment portfolio. While equity carries a high risk and may offer relatively higher rewards, debt has a lower risk and may provide lower returns comparatively. Keeping a mix of asset classes can ensure an optimal risk and reward ratio. The allocation can be decided based on your age and goals. Typically, investors follow the age rule, which indicates subtracting your age from 100 to determine the percentage of equity and debt in your portfolio. If you are 30, you may have 70% equity and 30% debt.
Irrespective of your age, if you are aiming at creating a portfolio of debt instruments, here are some steps you can keep in mind:
1. Assess your risk appetite:
Debt mutual funds carry relatively lower risk than equity, but they can still cater to different risk appetites. For instance, gilt or liquid funds have a shallow chance. Credit risk mutual funds, on the other hand, can carry very high risks. Hence, when building your debt portfolio, you must first assess the level of risk you are willing to take and then invest accordingly.
2. Determine your investment horizon:
Liquid mutual funds have a maturity of fewer than 91 days. Short-term and ultra-short-term mutual funds have 1 to 3 years of the investment term. On the other hand, other debt mutual funds like dynamic bond funds invest in short-term and long-term instruments with an investment horizon of 3 to 5 years. If you are looking for a place to park your idle funds that can be redeemed immediately, you may consider adding liquid funds to your portfolio. If not, you may consider other debt options.
3. Define your goals:
Long-term goals like retirement can be accomplished with options like the Public Provident Fund (PPF), Voluntary Provident Fund (VPF), Employee Provident Fund (EPF), or hybrid mutual funds. PPF, EPF, and VPF are government-backed schemes suitable for the salaried class. These can help you prepare for a future goal with regular contributions and systematic investment plans (SIPs). Similarly, a SIP in a hybrid fund can offer benefits like the power of compounding and rupee cost averaging for maximized returns.
If you are investing for short to a mid-term goal like purchasing a car or going on vacation, you may consider corporate bond funds. These mutual funds invest approximately 80% of their assets in high-rated AAA corporate instruments. These may carry moderate risk and deliver better returns than other debt instruments like fixed deposits.
To sum it up
Debt funds can help you lower risk and diversify your investment portfolio. However, it is essential to assess your unique needs and the characteristics of the various debt options to build a high-performing debt portfolio. The Tata Capital Moneyfy App offers several mutual funds and other investment options that can help you simplify your investments in one place. Download it and construct your financial portfolio anytime and anywhere!