Should Debt Investments be part of your long term portfolio?

Today, most investors understand that for longer duration investment, equity is the best option. But what they may not realise is that unlike fixed income instruments, equity never grows in a linear fashion. It goes through a lot of ups and downs over time. Juzer Gabajiwala, Director, Ventura Securities highlights thet while seasoned investors take these fluctuations in their stride, an investor who is relatively new to stocks could become anxious. Including debt in their portfolio along with the equity could help ease the stress for such investors, even if the investment is for a longer period.

Let us see why one needs to allocate a certain portion of investments to debt even for the long term.

1. Debt brings stability to a Portfolio:

Many investors tend to get attracted by the past return of equity without assessing their own risk appetite. But once reality dawns on them that equity returns are volatile and can deliver negative returns too, they get petrified and tend to exit at a loss. So, for such investors, it is always imperative to know their risk profile first and allocate their funds accordingly. Ventura Securities says including debt in a portfolio will not only provide stability but will also protect them from taking impulsive decisions like selling equity or equity funds at a loss. In the table below, we have presented benchmark past returns and volatility for portfolios with different combinations of equity and debt.

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2. Debt can work as emergency funds when markets are at low:

In the month of March, 2020, when the entire market crashed because of the ongoing pandemic, the equity segment fell by around 40%. And during that same period, many people lost their jobs. During such a situation, if any emergency had arisen, which necessitated encashing investments, investors with 100% of their portfolio in equity would have incurred huge losses. The availability of debt in a portfolio, which can be encashed at a predictable value, allows an investor to avoid losses that could occur from aggressively selling equity.

3. Sometimes Debt outperforms Equity:

As equity tends to be more volatile than debt, there are times when debt has outperformed equity. In the table below, we have considered equity mutual funds and debt mutual funds, showing the performance of various categories since the last 10 years. These are yearly returns and are intended to demonstrate volatility. Ventura Securities says in 2011, equity delivered negative returns; then again, 2015 and 2016 were low return periods for equity. Whereas 2014 and 2017 were excellent years for equity. It can be observed that because of the volatility associated with equity, there are times when equity funds have given lower returns than debt funds. So, those investors who cannot digest such volatility should include debt funds in their portfolio along with equity funds.