An individual’s portfolio creation is determined by their investing goals and risk tolerance. The information provided here is for cautious investors seeking for a little better yield than traditional fixed income products such as fixed deposits and recurring deposits. But please note that this is not any investment advice from me.
The most fundamental and reliable returns on investments come from liquid funds, or from fixed income funds with acceptable credit quality. While asset types like stocks promise higher returns, there are investment approaches that allow cautious investors to increase their basic returns without bringing on too much additional risk.
Bonds and debentures rated lower than AAA (say AA or A), while still deemed acceptable quality, levy higher fees (essentially the expense ratio), reducing the higher returns obtained from these types of investments.
If your investment is worth Rs. 50 lakh or more, you can choose fixed income options from PMS (Portfolio Management Services) of asset management firms with an established track record. However, while picking a PMS, be sure that periodic expenditures are acceptable. But if your investment budget is limited, you can buy bonds straight from the primary or secondary market. You can participate in secondary market bond dealings by purchasing bonds from a bond trading house or through online bond distributor platforms. However, the company that issues the bonds should be trustworthy if the bonds are rated lower than AAA, as you are taking on a credit risk.
If you are a cautious investor, you might investigate alternative basic choices, such as conservative hybrid funds, which invest 10-25% of their portfolio in stocks. This would provide consistency in equity exposure since it would be within a set range and maintained by the fund management. However, as these are categorized as debt funds, they are taxed as short-term capital gains at your marginal slab rate, regardless of holding period. So, while investing in these, you must also consider tax implications.
Gold is useful during times of geopolitical turmoil and as a general portfolio diversifier. While there are other methods to invest in gold, sovereign gold bonds (SGBs) have certain benefits. SGBs earn 2.5% per year (if held until maturity) in addition to gold price increase. These are also tax-free. You must ensure that SGB liquidity is maintained. Deployment in gold should be 10-15% of your total investment portfolio, because it is a portfolio diversifier rather than a primary investment asset. Hence, the dearth of liquidity in SGBs, which make up a tiny portion of the portfolio, should not be a concern; and is recommended to hold this till maturity.
Arbitrage funds are classified as equity funds. But there is no directed call on stocks, which means that arbitrage fund profits are not dependent on equity price movements. These funds exploit the gap between the cash equity market and the stock futures market. The differential between purchase positions in the cash market and contrapositions in the stock futures market is locked in for one month at a time. A minimum of 35% of the arbitrage fund should be invested in money market or debt securities. From this standpoint, it is similar to fixed-income funds. Taxation is an advantage that arbitrage funds have for investors. The fund’s growth option has a 10% tax rate for holding periods of more than one year. Since the indexing benefit has been removed from debt funds, the difference in net-of-tax returns has grown even more evident for these arbitrage funds.
