How to make most of your debt portfolio

Jan 11 2013, 09:07 IST
Comments 0 CEO Adhil Shetty explains ways to position debt portfolio so as to increase gains.

Debt market refers to the market where investors buy and sell debt securities. Also known as fixed income instruments, debt investments include investments in fixed deposits, corporate deposits, government securities, corporate bonds, PPF, EPF, NSC and debt mutual funds. Most debt market instruments work on the principle that falling yields will result in rising prices and vice-versa. Hence, the best time to invest in a debt portfolio is when interest rates peak and prices are low. When RBI begins to reduce rates to stimulate growth, interest rates will fall across the board. This will result in prices shooting up, resulting in a profit.

Although returns from equity can be high, it is not advisable to have all your investments in equity, as the risk is very high. Further, as you grow older and near retirement, you should increase debt component in your portfolio. In such a situation, how do you position your debt portfolio so as to increase gains?

Time your entry and exit: Your gains and losses on your bond portfolio are directly related to the macro-economic interest rates movement. When interest rates rise, bond prices fall and when interest rates fall, bond prices go up. As a result, your gains depend on when you buy and when you sell. It is, therefore, important to time your entry and exit on debt instruments carefully.

Debt investments should be in line with financial goals: Every one has certain financial goals and commitments in life, which can either be short term or long term. Equity markets have historically provided higher returns over a long term. Thus, for short term goals of less than 3 years, investing in the equity markets is not advisable on the back of high volatility. Debt instruments are preferable to meet goals of tenure less than 3 years. This is because, in addition to getting safe returns, capital protection is important.

Choose debt investments on your investment time horizon: Debt instruments are best suited for term period of less than 3 years. However, there are several types of debt instruments. How will know what to choose to maximise your returns? You must choose the debt instrument which best suits your investment time horizon. Liquid funds are best suited for a very short term horizon of 1 to 3 months, while income funds and fixed maturity plans can be chosen for slightly longer terms of 12 to 24 months.

Consider your liquidity needs:

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