Portfolio structuring and re balancing is considered to be one of the most important decisions for an investor to make. We might take great prudence when comes to making the right choices for investing funds in equities. But a great deal of importance should also be given to debt investments.
Debt assets provide balance to your portfolio. It helps you as an investor to invest a certain amount for a long period providing good returns after the maturity period has been attained. Considering the fact the post office savings scheme provides an interest of 7.5%, which has remained unchanged from a long time, may not give you the upper hand in enjoying the higher interest cycles in the market. Other investors might face another disadvantage since, it is difficult to find a debt fund that provides liquidity and tax exemptions after a lock in period of about 10-15 years.
Taking bank deposits in view, most banks currently provide interest rates of up to 10.5% for an invested period of 10 years. Post office and other savings schemes have a lock in period of 5 years. The most preferred debt investment is definitely the PPF since, after a lock in period of 15 years, you are benefitted from a good post tax return. A considerable amount is exempted as tax. So you gain on all the frontiers.
Due to high illiquidity factors, many investors find it difficult to get the right kind of debt assets where they can have the flexibility of withdrawing their investments in case of emergencies. Although limited profitability can be gained when tax intervenes, there are methods by which you can squeeze the benefit out of your debt.
Firstly, try to opt for a PPF. This, apart from the lock in period of 15 years, gives you excellent post tax returns. That is what is required for you as an investor. Try not to disturb those savings
Secondly, maintain an emergency fund. For any overnight emergencies, you need to have liquid funds in hand. It is not easy to liquidate assets that have a long maturity period. If you have a personal loan or a home loan amount to settle, make sure you part prepay or prepay the whole amount by liquidating other assets and not prematurely liquidating your PPF.
Thirdly, if you are opting for investing in debt assets through Mutual funds, try to consider that option that has a lesser tenor. Try not to opt for FMPs as they are mostly illiquid. The other type of debt mutual fund has the flexibility if providing the liquidity option and the value of investment tends to change with the fluctuations in market rates. The disadvantage lies in its functioning; the higher the rates go up, lower will be your NAV.
In order to tap the most benefit, it is advised that opt for a lesser tenor since, you are in a position to reduce the negative impact of market rates on your investments alongside providing you the tax benefit advantage.