Achieving the right balance of debt and equity in an investor’s portfolio is always a challenging task. These decisions are largely influenced by the phase of the investors’ life:
Phases in the investors’ life
Different phases as per the principles of financial planning:
1. Allocation to equity, as an asset class, should be higher vis-a-vis debt during the wealth creation phase.
2. As an individual proceeds into the wealth consolidation phase, the equity allocation should gradually come down and debt allocation should increase.
3. The equity allocation should be considerably low while approaching the retirement age.
4. Investors should refrain from investing into equities during the wealth distribution phase to ensure that they can keep from outliving their assets while maintaining their desired lifestyle.
For example, while planning for retirement, one should ideally start with a higher exposure to equities (vis-a-vis debt). However, along with investments into equities one should also diversify by investing in MIPs and Balanced funds.
What are MIPs?
MIPs or Monthly Income Plans are funds that are inclined towards debt. If you are sceptical about schemes that involve high risk and are looking to park your career’s worth of savings, MIP’s are a safe medium term option; with very limited exposure to risk and more or less stable returns through dividends.
MIP funds offer the following features:
1. The income is not limited to a monthly plan; you can choose to receive it quarterly, semi-annually or annually
2. A tax efficient fund, the dividends declared by MIP’s are tax-free in the hands of the investor
3. These usually have a debt: equity ratio of 75:25 or 85:15
What are Balanced Funds?
As the name suggests, balanced funds invests in debt and equity in almost equal proportions. Based on the market trends your fund manager may tweak the allocations slightly. These are ideal for investors looking to retire in the near future and have a moderate risk appetite. Compared to MIPs, balanced funds have a greater exposure to equity.
Some of the features of balanced funds are:
1. Provides diversification in its truest sense by investing in bonds and equities
2. Invests a sizable proportion in equities, hence the returns you receive are decent
3. Provides automatic portfolio rebalancing; an added cushion during volatile markets. Therefore, when markets are positive, the fund manager sells equity to maintain its maximum level and vice versa