Before you begin building your debt portfolio, you need to understand why you are doing so in the first place. Essentially, your investment portfolio contains equity and debt instruments, each of which serves a different purpose. The purpose of having debt instruments in your portfolio is to hedge risks from other investments such as equity and to preserve your capital. Another reason to include debt instruments in your asset allocation is liquidity. So, stability, safety, and liquidity are the primary goals of your debt portfolio. The question now is, how do you undertake investment management in a way that helps you achieve that? Let’s take a look.
- Decide on your equity vs debt allocation
The first thing you need to do when building your debt portfolio is decided on your asset allocation between equity and debt. Once you figure out the percentage of your equity investments, you can make investments in debt instruments accordingly. Based on your equity investments, you will know the kind of risks you need to hedge, and the extent of liquidity required through your debt investments.
- Build an emergency fund
The most basic layer or the foundation of your debt portfolio should be your emergency fund. This is essentially the money that is instantly accessible to you in times of need. Hence, liquidity here is of utmost importance. Most financial advisors suggest investing in money market instruments such as treasury bills and commercial papers that have short-term maturity periods. You can do this directly or you can invest in these instruments through liquid mutual funds.
- Focus on fixed-income instruments
This will be your core debt portfolio. Here your focus, when undertaking portfolio management, is capital preservation and generating fixed income. Hence, fixed-income investments such as Public Provident Fund (PPF), government bonds, etc., are what you should look at. You can also look at investing in debt mutual funds but ones that are low on credit risk as well as duration. Debt mutual funds won’t just help you earn interest but may also provide the benefit of capital appreciation.
- Follow the tactical investment strategy
According to financial advisors and wealth management experts, for 15% to 20% of your debt portfolio, you can follow the tactical or active investment strategy, which tends to be more experimental. Here, you take advantage of market changes and economic conditions. Dynamic bond funds and credit risk funds would fall under this category. It’s important to note that you should be aware of the risk involved and only invest in a way that aligns with your risk profile.
Strategically building a debt portfolio that is solid and helps you meet your financial goals can be tricky. Hence, you can consider seeking portfolio management services. An investment planner will not only lay the foundation for your portfolio but will also actively take over your wealth management so you can rest assured as your money is in capable hands.
