When you are in the retirement planning stage of your life—in your 30s or 40s—most advisors highlight the role of equity-oriented instruments, as they give the much-needed kicker to your portfolio.
However, what often gets ignored is the role of debt instruments, such as debt mutual funds, fixed deposits (FDs), National Pension System (NPS), Public Provident Fund (PPF), and small savings schemes in the portfolio.
Debt instruments balance risks and rewards in a portfolio, which is essential for making any realistic plan towards achieving long-term goals.
Says Sumit Madan, head, retail liabilities and branch banking, IDFC FIRST Bank: “Debt instruments play a vital role in retirement planning by offering stability, income, liquidity, and a hedge against inflation. Balancing these instruments with other asset classes is key to constructing a resilient retirement portfolio tailored to individual needs and risk tolerance.”
So how does debt provide stability to a portfolio? Dilshad Billimoria, founder, managing director and chief financial planner at Dilzer Consultants Pvt. Ltd, a Securities and Exchange Board of India (Sebi) registered investment advisor (RIA), explains with an example. Suppose an aggressive investor has 90 per cent of her portfolio in equity and the market suddenly falls, or she needs funds in the next eight months, she would lose her principal and would not be able to exit. “Therefore, adding debt to a portfolio is crucial from a goal perspective as well as for short-term fund. Debt lends stability to the portfolio, besides asset allocation, which is an important aspect in portfolio construction,” she says.
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