How much Equity and how much Debt should be in a Portfolio
There is a thumb rule that Debt
investment percentage should = age and Equity investment percentage should be
100-age . The more younger you are you should be more in equity . Alternatively
the older you are your investment should be more in debt. We should take not
take the mathematical proportion with complete rigidity but rather than
evaluate profile of the individual . Thumb rule is relevant only when the
networth or income level is inadequate to meet the day to day livelihood . Does investment in debt make any sense for
Mr Amitabh Bacchan or Mr Ratan Tata who are not young .
Income and Job stability is the
key thing before thinking on portfolio allocation in debt . Lets take an
example of an individual working in Government organisation , PSU and in a big
reputed private sector brand like TISCO, TELCO , Infosys . Does he carries
income risk or job risk . In my view No. His monthly income is there to take
care of his routine expenses . For such investors opportunity of maximising
gain should be the investment decision making .
Many experts also say when you
have retired your investment should be almost all in debt . Again we need to
look why . Its because may be you are dependent on that money in form of either
dividend or withdrawal to meet your both end meet . Lets take present day
example. Equity is giving or expected to give higher return than debt . So till
that is happening or expected to happen
why one can not be in equity mutual fund and opt for monthly Systematic Withdrawal
Plan from Equity MF scheme rather than investing in debt mf scheme and opting monthly
SWP from debt MF . Take an example -- equity mf is giving a return of 13 to 18
% CAGR and debt MF 8 to 10% CAGR . You
are adding some 3 to 5 % extra return in Equity fund which creates a bigger
base on year to year and money grows faster vis a vis debt fund . Also for same
amount withdrawal from both type of schemes the corpus left in debt will reduce
faster than in equity fund i.e when in equity fund sustenance period is longer .
Proportion of equity is not what
someone should decide while doing asset allocation. Its the minimum proportion
of debt to meet basic need and also giving a mental comfort level to be decided
. Rest all should go to growth asset. Minimum
requirement will vary from individual to individual but the basis of decision
should be similar. You should have debt investment to ensure you get the
quantum of amount you require in short to mid term . Any need of money required
in next 3 year should not be left to market risk but to be safe . For a period
3 to 5 year again one has to look at the market situation and take a call . So
decision can range from debt to hybrid to equity i.e perception on probability
of loss due to market risk . Beyond 5
year no reason to worry on asset risk but go for equity. Having said all these
there is a need to evaluate year to year performance of both asset i.e debt and
equity. If equity showing a declining trend for 2 consecutive year then you
need to understand the factors which is leading to that. If the factors are
there to stay for long then still keep safety rule of 3-5 years and not beyond
that .
