Being an investor, you would probably know that the returns made from the investment portfolio will always add to your finances. You can rely on fixed income instruments for certainty and stability if the valuation of your portfolio gets higher. Hence, your portfolio must contain a balance of fixed income and debt investment options.
32-year-old college professor Prateek Solanki is considering fusing his debt portfolio. He has some money invested in the Public Provident Fund and some in the bank fixed deposits. In order to diversify his debt portfolio, he can practice the following options:
- Fixed Deposits
If Prateek tends to possess any financial goals in the coming three years, he can look for the fixed deposit schemes offered by the banks and companies. The interest rates offered on fixed deposits are constant where bank FDs offer a holding period between 45 days to 120 months and the company FDs offer a holding period anywhere between six months to five years.
Well, this scenario restricts Prateek from withdrawing the money anytime even when there are certain FDs that allow premature withdrawal. Moreover, the interest generated from the FDs is levied based on the depositor’s tax bracket.
- Liquid Funds
Every account holder faces liquidity issues, and therefore, Prateek will face the same on the FDs. He can either go for liquid funds or keep the money in the savings account to avoid liquidity issues on FDs. The savings account will fetch Prateek 4% interest whereas; the liquid funds could fetch 7-8% interest. The money invested in liquid funds can be easily cashed into the depositor’s account within a day.
On the other hand, similar to the interest earned on the FDs, the capital gain earned on liquid funds within three years of investment will be levied the same way. Moreover, the capital gains will be levied at 20% if it is cashed in after three years.
- Short-term Accrual Funds
A short-term accrual fund is a part of mutual funds where the investors invest in money market instruments and short-duration corporate bonds. These funds generate income either with debt securities or by withholding high-yield bonds of low duration. Low duration makes sure that the risks included with high interest get limited. Fixed maturity plans, ultra-short-term funds, and short-term income funds are some examples of such funds.
- Duration Funds
These are probably high-risk funds but are very good investment options. It can avail you double-digit return if invested when the interest rates are declining.
- Tax Saving Bonds
The government-approved infrastructure companies issue these long term bonds and the interest earned avail tax-free benefits. However, the interest rate on these bonds is the same as the government bonds.
As Prateek come under the 30% tax bracket, tax-saving bonds provide better investment options to him compared to other long-term deposits. For example, a tax-free bond in common offers an annual interest rate of 7.5% whereas a bank FD offers 8.5% annually. When Prateek invests Rs.1 lakh in both the funds, the after-tax return from tax-free bonds will be Rs.7, 500/- whereas; Rs.5, 874/- will be the after-tax return from bank FD.
- Public Provident Fund and Employee Provident Fund
These two investment options are completely tax-free, and no tax is levied on the withdrawal amount as well as on the interest. Also, the tax deduction is eligible for the contribution made. The public provident fund offers the customers 8.7% interest annually and saves up to 30% tax on the deposited amount annually where 12.5% is the maximum after-tax return.
The maximum holding period of a public provident fund is 15 years whereas; the employee provident fund holds the money until retirement.
Add Spice to the Portfolio
In order to spice up Prateek’s debt portfolio, he should assign his money to debt mutual funds. This will help him in generating attractive returns in a fixed income portfolio.