The recent surge in benchmark indices — the Sensex and the Nifty — could be inspiring investors to enter into stocks after a two-year hiatus. But, if you have a short- or medium-term goal, such as funding a travel abroad or buying a new car, most financial advisors would tell you to go for debt instruments.
According to Anil Rego, CEO, Right Horizons, if the goal has to be achieved in the next six months to two years, the current interest rate scenario could be utilised to generate better returns on low-risk investments.
Before building a debt portfolio, an important thing to take into account is age. Remember, the portfolio for a 60-year-old would be different from the one for someone who is 35 (See Table).
Then, depending on the financial goal, there are a number of options – from bank fixed deposits (FDs) to fixed maturity plans (FMPs) of mutual funds to company non-convertible bonds (NCDs). Most of these are safe, but there are some risks associated with company deposits because if a company fails to pay in troubled times, an investor has little scope for redressal.
There is a simple way of identifying companies in trouble. When banks are offering 9-10 per cent on their fixed deposits, a company should be seen as desperate for cash it it offers over 14-15 per cent for a similar tenure. Avoid such companies.
Debt liquid/money market mutual fund or FMPs are the best option for any need arising in six months to one year. FMPs are closed-ended schemes that invest in fixed-income instruments with maturity coinciding with the maturity of the scheme. In the short-term, the basic idea should be to beat savings bank rates, which are hovering at 4-6 per cent.
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For the medium term, one can take little risk and invest part of the money into dynamic funds. Company bonds, especially those of public sector undertakings, are also available at attractive yields.
With the current interest cycle, one can look at investment into bonds with timeframes of two to three years. In case of bank FDs, it is advisable to look at post-tax returns for any investment.
Bank FDs and NCDs should be used for investment horizons of more than one year. One can look at debentures or FDs of high quality companies offering two-three per cent more than bank FDs. “Bank FDs, post office deposits and private provident fund are best suited for those who are in the lowest tax bracket,” says Raghavendra Nath, MD and CEO, Ladderup Wealth Management.
| A 35-YEAR-OLD CAN BUILD A DEBT PORTFOLIO FOR UP TO TWO YEARS | ||||
| Period/goals | Product | Return (% pa) | Invested (Rs) | On maturity (Rs) |
| Foreign holiday | Debt liquid funds, bank FD, fixed maturity plans | 7-8 | 196,000 | 200,000 |
| 1 year: New car | Debt liquid funds, bank FD, fixed maturity plans | 7-8 | 465,000 | 500,000 |
| 2 years: Down payment for house | Dynamic fund, Bank FD, bonds, fixed maturity plans | 8-10 | 825,000 | 1,000,000 |
| A 60-YEAR-OLD INVESTOR CAN BUILD A DEBT PORTFOLIO FOR SIX MONTHS TO TWO YEARS | ||||
| Period/goals | Product | Return (%) | Invested (Rs) | On maturity (Rs) |
| Six months: Repair of house | Debt liquid funds, Bank FD | 7-8 | 98,000 | 100,000 |
| 1 year: Daughter's wedding | Debt liquid funds, Bank FD, Gold mutual fund | 7-8 | 465,000 | 500,000 |
| 2 years:Holiday | Debt MIPs, Bank FDs | 8-10 | 165,000 | 200,000 |
| Figures are based on the current interest rate scenario | ||||
However, remember this: If you are counting on debt investments for long-term returns, you are making a mistake. Debt will seldom beat equities in the long term.