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POSTED BY ON February 23, 2012 1:12 pm COMMENTS (5)
HI,
What should be the long term debt investment strategy? I have read that asset allocation is key to building wealth. But let’s say I allocate assets in the ratio of 70:30 (equity:debt), what am I supposed to do with the debt long term? Again, this is because equity is for long term while debt is for short term.
Many Thanks in advance,
Ram
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Dear rmohan;
choice of debt or equity depends upon ur goal.
If your goal is short term say you want to purchase a car in next 2 years of time then rather than the return from equity you will look for safety of your fund.
at any time you can not have 100% equity in ur portfolio as it very risky as u may require urgent funds in future which is more than ur contigency fund , so it is better to have some portion of ur portfolio in debt even if u do not need it in near future
Dear rrmohan, May I know the origion of this myth given to you that Debt is for short term.
Please do understand, Eq. as well as Debt both are required to create a long term wealth.
Regarding re-balancing of debt & eq. in your portfolio, you have the choice to do it after an interval of every 12-15-18-24 months.
Thanks
Ashal
Hi Ashal,
I’m not sure why you call this a myth. Maybe I misunderstood but as per Manish’s book Debt is for short term while equity is for long term.
Again, I think I may have misunderstood the chapter in the book
Thanks,
Ram
Dear Rmohan, Please understand the chapter of dear Manish’s book clearly or should I say idea behind the whole discussion. For short term goals, say for next 6m or 1Y or 2-3Y, Debt is the only choice. When you are saving for long term (7-10-15-25Y), Eq. is the best & must asset class but in this case too, the Debt in the form of PF or PPF is required to maintain the comfort of asset rebalancing & long term compounding effect on our Debt products.
Thanks
Ashal
One easy allocation to Debt is via EPF/VPF for the salaried and via PPF.
Keep transferring the EPF from one employer to the other – dont spend. Again for PPF after 15 years keep renewing for 5 years apiece and continue contributing. For many people this alone can help keep the Asset allocation balance.
If you need to invest in more debt opt for Tax Free bonds that have started to be rolled out (Expect more as targeted amounts for expansion rise each year). Keep any additional money in short term debt funds on an ongoing basis. MIPs are not 100% debt but can still be considered as part of the Debt folio (whatever extent Debt is, the rest goes to euity).
Rebalancing does not necessarily result only by selling one asset and moving to the other. Just changing the fresh contributions towards the other (now) low weightage asset can accomplish rebalancing as well. HOwever when fresh contributions reduce/stop then active rebalancing every 12-18 months is recommended.