Assured return instruments, a must in all portfolios

Bhaskar was in a good mood. He was smiling presently and was in an elevated frame of mind. He was showing me his collection of Music & video CDS/DVDs and was explaining animatedly about some of his new acquisitions. I was happy for him. It was not always like this, though.

Bhaskar is one of those high-adrenaline types, who thrives on taking risks. In fact for Bhaskar, nothing look like a risk. For that reason, he has also been pretty successful in his entrepreneurial ventures where this risk taking ability nicely blended with his good eye for spotting opportunities and moving in decisively.
Bhaskar however was a miserable pulp 3 years before – in 2008. He had bet on Equities in a major way and had been doing very well. Like all those who taste huge success early on, he took too huge a risk by betting on various momentum players, with borrowed money. He lost crores of rupees in 2008.

That is when he had come to me. I had to calm him down and firstly make him see the sunny side of things. He was so dejected that he just saw gloom all around. I had to remind him that he had thriving businesses and he would be able to bounce back from the setback. I also told him that we will have to redo the portfolio and bring some sanity into it.

The first thing I had to do was to educate Bhaskar on the need for diversification, appropriate asset allocation, streamline investments in line with the goals, discipline & regularity in investments, investment horizon etc. It was not that Bhaskar was unaware of these… he just ignored all these due to his gun-slinging-cowboy like attitude towards investing.

When I had suggested that he rebalance the portfolio and have a decent allocation towards debt instruments, he had glared at me. He was incredulous that I was even suggesting this, I had to spend time…

Investing in instruments which give high returns were fine. But in one’s portfolio, there has to be a good mix of all kinds of assets from low risk-low return instruments to high risk-high return ones. The low risk instruments tend to be debt instruments, which are not very exciting for a person like Bhaskar. He infact made me say that the post-tax returns in debt instruments may not even beat inflation. But still, I insisted that these instruments will ensure that the capital is safe and some returns accrue from them. In fact these kind of instruments should form the bedrock on which one’s portfolio edifice needs to be built. These instruments are the ones that steady the portfolio.

Again there are different debt instruments and one needs to make appropriate choices. PPF will be a great choice for those with a long investment horizon. This will be suitable for accumulating one’s retirement corpus, children’s education / marriage requirements etc. Also PPF gives a decent 8% post-tax returns. PPF was started with the objective of giving access to a Provident Fund like account ( which is available to Organised sector employees ) to others who do not have access to PF. PPF was created with the mandate to assist individuals to build their corpus for their retirement needs.

Post office MIS helps those who want regular returns. Kisan Vikas Patra is another product with a 8 year 7 month duration, which doubles the money in this time frame. In the current regime, it is not all that attractive. Bank FDs themselves are offering 9.25-10% returns for 1-2 year tenures. There are Bonds & NCDs which are coming out with attractive rates too. Company Fixed deposits are offering between 9-11% pa. But in all these instruments mentioned, the interest income is taxable.
That however does not diminish the merit of having these in one’s portfolio as one requires stability too. The others which can potentially offer better post-tax returns are Fixed Maturity Plans from Mutual Funds. Apart from this there are several debt funds which could offer good post-tax return as the interest rate cycle is expected to turn sometime from now. Dynamically managed funds are best bets at this juncture. Apart from this, in times to come, Income funds with longer maturity papers and Gilt funds themselves would pose good opportunities.
The main point that I wanted Bhaskar to appreciate was that having these in the portfolio improves the chances of the goals being met, not the other way round. I had to hammer it across, that equities, though it offers good returns, carries high risk. He was not very convinced, though he reluctantly gave the go ahead to redo the portfolio. He did buy some equities after that too! And now they are trading at at a loss. But Bhaskar is not bothered. He has now understood the importance of his debt portfolio, secure in the knowledge that nothing can affect at least this portion. It helps that I had suggested 45% in debt instruments for him as he anyway takes high risk in his business. So you know why Bhaskar is atwitter now!

Authored by Suresh Sadagopan ; Published in The Financial Chronicle on 24/8/2011