Inventment in Debt

we read in the last article about investing in Equity, but not all want to take the risk. In such cases debt is a good option. The advantages of investing in debt is principal is safe, return are more or less assured and you do not need to do much research. As it is very well regulated, just like equity. The options available are plenty, which could lead to confusion.  So with so many options what should we look for? Here are some pointers to consider. Check from the tax angle is the interest received taxable? If yes, what would be the tax impact?

As you are aware Interest is taxable under income from other sources. Also when you receive the investment back (if more than a year) it is treated as capital gain. Check if the returns meet your cashflow requirements. As with many options, returns could be monthly, quarterly, half yearly, etc. So check it out and try to get the maximum returns with all the options given above. Though I mentioned that the principle is safe, there is a risk that the company or the bank would go into a bad financial phase, wherein your money could get blocked or even lost.

Some of the most common debt instruments are fixed deposits (bank and company), PPF and government bonds. We should also put debentures into this category, but we need to look at the type of debenture to decide. As some debentures give good returns, we need to look at the credit ratings of such debentures, before investing. All financial advisors would say that some portion of your portfolio should be in debt, this is just to take care of the risk of investing. When you are younger, the proportion of debt in your portfolio can be lower, but as you grow older, this proportion should increase.

This is because your risk taking ability reduces as well as your earning capacity. It there is a fall in the market, usually the impact on debt is low or nil, depending on the debt instruments you have invested in. However remember, debt investment usually does not beat inflation, in fact it is observed that it erodes the value of your investment. While investing it debt look at the lockin period of your investment. Unlike equity, where you can sell and get out of an investment whenever you want. In case of debt usually the period is fixed. Example is, in case of PPF your locking would be 15 years.

As we had mentioned earlier if you invest in debt risks are lower or nil, now a days some new types of investments have come called fixed maturity plans. These are funds promoted my mutual funds, which invest in the debt market. It is observed that usually these funds give a good return, but it is not guaranteed.

Anyways, all said and done, if you are risk averse, debt is the way to go.