Fear money loss? Is debt best way to earn money? You should profit from this guide

In a volatile market, fear of losing money haunts investors and they start looking for safer bets. Due to this fear investors may not think twice before pulling out their “hard earned money” from equities. The convenient investment option instead of stocks would seem fixed income or debt instruments, as they offer steady and guaranteed returns.

But, should you go for an all debt portfolio in order to beat the stock market volatility? DNA Money spoke to financial advisors to help you get out of this monetary conundrum. The following pointers will help you understand what you should do in a volatile market to keep your investment intact and returns steady.

Liquidity, tenure and needs

An investor should not opt for and build an all-debt portfolio just because equity markets are not doing well, said Suresh Sadagopan, certified financial planner and founder of Ladder7 Financial Advisories. Even if you want debt funds in your portfolio, one should keep them at a certain proportion.

“Debt instruments that can be included in one’s portfolio will depend on one’s liquidity and tenure needs, income needs, risk-reward equation one is seeking and taxation of that person,” Sadagopan said. You should also align at least one financial goal with your financial investment.

“Based on these conditions, one needs to choose from bank and corporate fixed deposits, non-convertible debentures, small savings instruments, debentures, Public Provident Fund, Fixed Maturity Plans, perpetual bonds or tax-free bonds, etc,” he added.

If your tenure is for two-three years, you can opt for debt products and arbitrage funds that will offer good tax adjusted return. You can invest in debt Systematic Investment Plans (SIPs) for a holiday in a year’s time. For home renovation after two years, go for short-term debt funds or arbitrage funds. For your child’s education which is seven years away or more, you can invest in equity-oriented funds with a certain proportion in debt funds.

Not suitable for long-term goals

Holding an all-debt fund portfolio is not good if you are eyeing long-term goals like children’s marriage or higher studies. These are goals that will make a big dent in your pocket. For these purposes you will have to save extensively and equity is the best option.

However, risk averse investors do opt for debt or fixed income investments to avoid equity market fluctuations, said Amar Pandit, CFA and founder of HappynessFactory. “It doesn’t mean that such (risk averse) investors should invest only in bank FDs, corporate FDs, NCDs, bonds and postal investments etc,” he said.

If you are choosing to go the debt route for your investments you will have to invest more, he pointed out.

Good for short-term goals, after retirement

It is advisable to invest in debt instruments once you attain the age of retirement or have already retired. At that time safety of capital is more important than the higher rate of return you get from long-term equity investing.

Building an all debt portfolio is advisable in the retirement phase of life, as well as when there are short-term goals of say two to three years, said Karan Gupta, Sykes and Ray Financial Planners. Debt mutual funds also enjoy indexation benefits, like property.

“It is advisable to purchase debt schemes with a low exposure to government sovereign bonds and higher asset allocation towards high rated corporate bonds,” Gupta said. This way you can avoid any volatility be it market or interest rate fluctuations.

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Debt means investing more money

If you want to invest money using debt funds, you will require more money than you would have required for investing through equity markets, said Srikanth Meenakshi, founder of FundsIndia.

For example, if a person wants Rs 1 crore in 20 years, he will have to invest Rs 10,800 per month in equity funds, assuming a return at 12% rate.

In case of debt fund, assuming an annualised 8% rate of return, the investment will increase to Rs 18,000 per month, that is, 65% more money, Meenakshi explained. If someone wants to invest only in debt, the condition of the equity market should not sway them from their decision.

“For longer-term goals, dynamic bond funds are well-suited. Even for longer-term goals, having some short-term funds in the portfolio will be helpful to tide over raising rate scenarios. Investing for the long-term, however, is best done in equity since the return potential will be higher,” he said.