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Creating a debt portfolio

business Updated: Oct 01, 2007 01:41 IST

The easy way to build a portfolio would be to pick up fixed deposits or bonds from the market, writes Arnav Pandya.


At a time when there are lots of developments in the equity space, most people have given little thought to their debt portfolio. Debt is an important component that cannot be ignored as they assure positive returns under any circumstances.

There are several options available for this purpose. The simplest way to build a debt component would be to just take some fixed deposits or bonds present in the market.

Another way by which one can create a sophisticated debt portfolio is by using mutual funds. A few things need to be kept in mind while this is being made.

Mix of schemes

The investor should have a mix of schemes from the debt side that will give a certain character to the debt portfolio.

There can be a liquid scheme plus a short-term scheme and the proportion of each of these holdings should be such that it meets the requirements of the individual.

Short-term as well as long-term income and gilt funds will have different risk profiles and these have to be carefully analysed and then given the necessary weights.

Outlook and expectations

The outlook and expectations of the individuals regarding the movements in interest rates should determine the composition of investments in various schemes. Short-term schemes will have lower risk in the sense that if the debt market moves against expectations, then the impact will be less but this is accompanied by lower returns. Long-term schemes on the other hand have a higher risk.

But if the estimate is correct, then the gains are also higher. In the current situation, with the long-term outlook not very clear, most investors prefer to stick to short-term plans.

Small difference

In case of debt schemes present in the market, there is likely to be very small difference in the returns that they are
generating.

The kind of distinction that is seen between equity schemes would not work and hence the composition of the portfolio and the basis of the performance have to be studied keeping the investment mix in mind – diversified but giving maximum returns. Like equity schemes most of the debt schemes do not fluctuate during the tenure.

Create a portfolio

The final task of creating a well-rounded debt portfolio can be undertaken in several ways.

A selection of various mutual funds can be used or even a fund of funds can be used, where the debt component either alone or along with the equity investments will comprise the desired weight in the portfolio.

The final decision has to be taken by the investor considering his or her own needs, convenience and comfort.

(The writer is a Certified Financial Planner)