Explained: How to build a debt portfolio for the long term
PPFis a popular choice for retail investors seeking long-term savings, especially for retirement.
- One can increase their
EPFcontribution for their long term debt portfolio meant exclusively for retirement goals.
interestrates peaking out, one may explore gilt funds for their medium to long term debt portfolio.
AdvertisementAsset allocation is one of the chief tenets of investment. Basically, it means that your investments are spread across different asset classes, majorly equity and debt. What the ratio should be would depend on a lot of factors like age, risk appetite and so on, and would change with time.
When we think of equities we think of stock or mutual funds. Here, we will take a look at how you should invest the debt portion of your portfolio in terms of the different options you have.
Public provident fund (PPF)
Public Provident Fund (PPF) is an excellent choice for retail investors seeking long-term savings, especially for retirement. It offers tax benefits, with investments up to ₹1.5 lakh being tax-exempt per year under section 80C.
However, other payments like life insurance premiums, EPF and home loan principal repayment also come under 80C. Hence, it is important to understand how much tax benefits one will get by investing in PPF and invest accordingly.
Voluntary provident fund (VPF)
VPF refers to the additional contribution an employee can make to employee provident fund (EPF) over and above the mandatory contribution.
The interest earned on an employee's contributions to EPF and VPF is exempt from taxes for contributions of up to ₹2.5 lakh per financial year. “So one can optimise investment up to the tax advantage and not beyond that,” says Mukesh Kochar, national head of Wealth, AUM Capital, a wealth management firm.
“One can increase their EPF contribution for their long term debt portfolio meant exclusively for retirement or goals after retirement. On a post-tax basis with sovereign guarantee, EPF still remains the best debt investment option for a long term portfolio,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.
This works best for someone who has a small salary as one can contribute a large additional amount and stay within the ₹2.5 limit.
AdvertisementOne should thus try to allocate a large portion of their long term debt portfolio towards EPF and then PPF.
“This seems to be the best time to invest in debt instruments as we believe that the interest rate cycle has peaked out. Reversal of rate may take some time but it has peaked out and there is a great opportunity to capture capital gain whenever the interest rate reverses,” says Kochar.
Agres Nehal Mota, co-founder CEO of Finnovate Financial Services,
Advertisement“After exhausting the above options I would opt for debt mutual funds with a little longer term maturity. Since the interest rate has peaked, bonds with a little longer term duration will have more capital appreciation.”
“So they can explore gilt funds for their medium to long term debt portfolio for the same. For a short term debt portfolio, overnight and liquid funds are better options,” says Kumar.
Also, capital gains on debt funds are taxed only in the year of redemption. In contrast to that, interest on bank fixed deposits are taxed every year. So one can defer their tax incidence by investing in debt funds.
Sukanya Samriddhi Yojana
If there is a girl child Sukanya Samriddhi Yojana (SSY) is also a good option. “SSY has an exempt exempt exempt tax structure. But I would not recommend this for tax savings but because the daughter will get a lump sum amount at 21,” says Mota.
AdvertisementTo sum it up, when you're building your debt portfolio, the key is to mix different types of debts, be careful with risks, and also keep in mind the tax aspect. This way, you can secure your financial future.
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