PPF is a popular choice for retail investors seeking long-term savings, especially for retirement.- One can increase their
EPF contribution for their long term debt portfolio meant exclusively for retirement goals. - With
interest rates peaking out, one may explore gilt funds for their medium to long term debt portfolio.
When we think of equities we think of stock or mutual funds. Here, we will take a look at how you should invest the debt portion of your portfolio in terms of the different options you have.
Public Provident Fund (PPF) is an excellent choice for retail investors seeking long-term savings, especially for retirement. It offers tax benefits, with investments up to ₹1.5 lakh being tax-exempt per year under section 80C.
However, other payments like life insurance premiums, EPF and home loan principal repayment also come under 80C. Hence, it is important to understand how much tax benefits one will get by investing in PPF and invest accordingly.
VPF refers to the additional contribution an employee can make to employee provident fund (EPF) over and above the mandatory contribution.
The interest earned on an employee's contributions to EPF and VPF is exempt from taxes for contributions of up to ₹2.5 lakh per financial year. “So one can optimise investment up to the tax advantage and not beyond that,” says Mukesh Kochar, national head of Wealth, AUM Capital, a wealth management firm.
“One can increase their EPF contribution for their long term debt portfolio meant exclusively for retirement or goals after retirement. On a post-tax basis with sovereign guarantee, EPF still remains the best debt investment option for a long term portfolio,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.
This works best for someone who has a small salary as one can contribute a large additional amount and stay within the ₹2.5 limit.
One should thus try to allocate a large portion of their long term debt portfolio towards EPF and then PPF.
Debt funds lost some of their appeal after the indexation benefits were removed but in the current context, it makes sense to invest in debt funds.
“This seems to be the best time to invest in debt instruments as we believe that the interest rate cycle has peaked out. Reversal of rate may take some time but it has peaked out and there is a great opportunity to capture capital gain whenever the interest rate reverses,” says Kochar.
Agres Nehal Mota, co-founder CEO of Finnovate Financial Services,
“After exhausting the above options I would opt for debt mutual funds with a little longer term maturity. Since the interest rate has peaked, bonds with a little longer term duration will have more capital appreciation.”
“So they can explore gilt funds for their medium to long term debt portfolio for the same. For a short term debt portfolio, overnight and liquid funds are better options,” says Kumar.
Also, capital gains on debt funds are taxed only in the year of redemption. In contrast to that, interest on bank fixed deposits are taxed every year. So one can defer their tax incidence by investing in debt funds.
If there is a girl child Sukanya Samriddhi Yojana (SSY) is also a good option. “SSY has an exempt exempt exempt tax structure. But I would not recommend this for tax savings but because the daughter will get a lump sum amount at 21,” says Mota.
To sum it up, when you're building your debt portfolio, the key is to mix different types of debts, be careful with risks, and also keep in mind the tax aspect. This way, you can secure your financial future.