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What is included in your fixed income allocation?

While one is cognisant about equity allocation, given its risk profile, often we are not as meticulous in defining our fixed income allocation. However, in order to have an efficient portfolio and maximise gains for your risk level, it is important to identify your fixed income allocation accurately too.

You may have read about the importance of asset allocation. This term refers to spreading out of your investments into different types of products which through their varied risk return structure make your portfolio balanced. You may have investments in equity shares, mutual funds, deposits, real estate and so on. This spread out investment is essentially your asset allocation. 

While one is cognisant about equity allocation, given its risk profile, often we are not as meticulous in defining our fixed income allocation. However, in order to have an efficient portfolio and maximise gains for your risk level, it is important to identify your fixed income allocation accurately too. 

Here are the six things you shouldn’t forget to include.

1. Deposits

Bank fixed deposits and company deposits which give you a fixed return for a specified period, clearly belong in your fixed income allocation. 

2. Bonds

Non-convertible debenture, tax free bonds and other government bonds also are part of your fixed income exposure. These are products which will give you a fixed return, again for a pre-determined fixed period. 

3. Debt funds

These don’t behave like your typical fixed income products, but belong in that portion of your portfolio allocation. Debt funds however, are of many types, you should be careful while assigning allocation. The very low maturity debt funds like overnight funds and liquid funds may even form part of your cash like allocation rather than fixed income. 

4. Provident Fund

Both your public provident fund investment and what you (and your employer) are contributing to EPF need to be considered in the fixed income allocation. While planning your retirement linked investments, don’t forget that a large part of the debt allocation is already there in EPF. You can find out the balance and add this to your current portfolio and then decide the appropriate asset allocation. Don’t make the mistake of investing lower amounts in equity, without considering this fixed income allocation.  

These don’t behave like your typical fixed income products, but belong in that portion of your portfolio allocation. Debt funds however, are of many types, you should be careful while assigning allocation. The very low maturity debt funds like overnight funds and liquid funds may even form part of your cash like allocation rather than fixed income. 

5. Small Savings 

National savings certificate, post office savings and recurring deposits are all products that contribute to your fixed income allocation. These are usually smaller amounts, but if you hold a few they can add up to a significant figure. Hence, don’t ignore these.

6. Insurance

If you hold endowment policies, money back policies or ULIPs with debt holdings then they all belong in your portfolio’s overall debt allocation. You must apportion the redemption amounts from these securities into your portfolio debt side too. 

When you combine all these together you will realise that your natural long-term debt allocation is perhaps higher than you earlier accounted for. What this does is give you more space for allocating to equity which enables you to have a better approach to long term wealth creation.

 

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