If you were to do an elementary Google search for the proportion that you should invest in debt, you are very likely to come across the (100 – Age) formula. What this formula basically says is that if you are 30 years old then you must have a 70% exposure to equities and if you are 60 then you must have a 40% exposure to equity. While there is no real scientific basis to this formula, what it captures is that as your risk appetite reduces with advancing age you need to increase your exposure to debt and debt funds to reduce the volatility in your portfolio. To that extent this formula is intuitively correct in the sense that it does underscore the important role that debt funds play in your financial portfolio.
Planning your investment portfolio can often be a tricky thing. The primary objective that most individuals pursue is the growth of capital. Ask investors about what they desire from their investment and the first thing they will say is higher ROI.
But maximizing gains can be a bit tricky. Simply because there are many investment options that an individual has to deal with it. Choosing between equities, fixed deposits or even commodities like gold, etc. is often a tough choice to make. The issue is that the investment options that potentially give the maximum returns like equities are also fraught with risks which investors need to understand.
Thus, rather than just pursuing growth for the sake of it, investors need to take a rational and logical decision. They need to diversify the investment portfolio with a bouquet of options, ranging from high growth instruments like equities to relatively safer investment options like debt funds. Little wonder then, that one of the common rules of investment is that your investment portfolio must always include fixed-income products (like debt funds), no matter what your age is or how interest rates are moving.
The real benefit of debt is seen only when the markets start falling and the value of the equity portfolio starts declining. Even though the equity part of this portfolio would fall when the market falls, the debt funds may help to cushion the fall. Investors typically get carried away by the well-performing asset class and ignore rebalancing in the greed to make higher profits. However, they lose out when the asset class cycle reverses.
It always important to balance things whether it in life or portfolio. Balance brings in stability and helps us to tackle uncertain times.
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