You want the best for your kids. You can give them the best only when you have the right funds at the right time. For that, you need to plan your investments. We tell you how.
There is huge hue and cry in investing circles about how important a stock portfolio is and how one should carefully review it from time to time. The fact is that even a portfolio of Fixed Income instruments such as your Fixed Deposits, needs to be carefully constructed and maintained. This would help minimise risks (for the elderly) and maximise returns (for the young). And do you know that even a fixed-income investor has a risk profile? We tell you all about creating and maintaining your fixed-income portfolio and which instruments to look at.
Getting the proportion right
Asset allocation is something that needs to be done before making any investments. Fixed incomes instruments are no exception. The general rule of thumb is to take your age as the percentage that you will allocate to fixed income instruments. Based on this rule, one should have at least 20-25% of their portfolio in fixed income securities at all times, depending upon when an individual starts earning.
Additional Reading: How To Switch From Fixed Deposits To Debt Mutual Funds
However, remember that if you are investing for a goal, your asset allocation cannot follow this rule of thumb. For example, if you are saving to buy a house and the goal is a year away, you need to have at least 90% of your investments in fixed income instruments as you cannot afford to lose your capital by investing in risky assets. Your risk profile will also have an impact on the allocation. Contrary to popular perception, even fixed-income investors have a risk profile.
Risk profile
All financial instruments carry some amount of risk. And the risks associated with fixed-income instruments include credit risk, interest-rate risk, and inflation risk among others. The nature and intensity of risk varies from product to product. In case of fixed-income products, the risk is less as products are not market-driven. So, you need to ascertain your risk profile. This will help you determine which fixed-income instruments to go for. For example, if you are willing to take on credit risk for higher returns, you should be investing in corporate deposits and corporate bonds.
Diversification
Similar to your stock portfolio, your fixed-income portfolio also needs to be diversified. A diversified portfolio gives investors an edge as they can choose products with different maturities from different companies. This can help them meet various goals. Also, putting all your money in one instrument is highly risky. Have at least four fixed-income instruments in your portfolio to get the benefits of diversification.
Essentials
Some instruments should be a part of your portfolio irrespective of your age or risk profile. Public Provident Fund (PPF) is one of them. PPF is an ideal instrument to accumulate a tax-free corpus over 15 years and is extendable later on. The same applies to bank deposits. Bank fixed deposits provide better liquidity when compared to corporate deposits and bonds and also give reasonable returns. Infrastructure bonds should also be part of any FI portfolio as they give tax breaks along with good returns.
Additional Reading: 5 Simple Tips To Manage Multiple Fixed Deposits
Which ones are for you?
When choosing a fixed-income instrument, you should keep four things in mind – your age, your risk profile, the goal for which you are investing and the time to reach that goal. For long-term goals, corporate deposits and bonds are ideal. For near-term goals, go for bank fixed deposits. Senior Citizens Savings Scheme (SCSS) is a must for the retired. Consider post office schemes for regular income. If you are saving for your child’s marriage or education, choose National Savings Certificate.
Re-balancing
It is important to keep monitoring your fixed-income portfolio at least once a year, especially if you have invested in corporate deposits or bonds. One should review the financials of the company issuing the instrument and in case of a downward change, one should review the portfolio with the help of their financial adviser.
Interest-rate risk is the biggest risk associated with fixed income instruments. Interest-rate risk is the risk of not getting the same return on the instrument when the instrument matures. Re-invest the maturity proceeds in a higher-yielding instrument or at least one that gives the same returns. But ensure that your portfolio doesn’t become concentrated. For example, a portfolio only comprising PPF, EPF, NSC, will become a concern in case you need money immediately.
The fixed income list
| Type of fixed income instrument | Interest rate |
| PPF | 7.6% p.a. |
| EPF | 8.55% p.a. |
| NSC | 7.8% p.a. |
| Post Office monthly investment scheme | 7.5% p.a. |
| Corporate FD | 8-10% p.a. |
| Bank FD | 6-7% p.a. |
| SCSS | 8.4% p.a. |
Additional Reading: With Interest Rates Falling, Look Beyond Fixed Deposits For Better Returns
Points to note
If you are over 60 years old, it is best to ensure that your fixed-income investments are divided between those that are liquid and those that generate regular income. If you are looking to maximise returns and at the same time remain liquid, here’s a strategy. Buy very short-term securities and very long-term securities simultaneously. This allows you to gain from the higher yields of long-term security, even as you remain liquid by investing in short-term financial products.