Many readers keep asking variants of this question: How should I design my fixed-income portfolio after Budget 2024?
The answer is quite simple. Always follow a simple thumb rule: Saving tax is NOT a priority. Diversifying portfolio risk is THE number one priority. This has to be done regardless of tax rules. So we do not change the composition of a portfolio just because tax rules have changed.
Fixed income is an essential part of the portfolio regardless of how it is taxed. We will just have to make peace about the tax, accept it and move on.
We recommend at least 40% fixed income for goals more than 10 years way initially. This allocation has to be progressively increased as the goal deadline nears. The freefincal robo advisor tool automates this crucial risk management step.
These are some illustrations.
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Note: The funds mentioned in this article are only examples. There should be many other funds which are equally good out there. Readers are urged to dig deeper.
Our recommended fixed-income options for goals with deadlines 5Y away or less.
Use our quarterly hand-picked list of funds known as Plumb Line for more fund recommendations.
Equity allocation: 0%
- FDs, RDs
- Liquid Funds
- Money Market Funds
- Arbitrage Funds (come with risks, returns not too much).
For goals with deadlines more than 5Y away but less than 10Y away
Equity allocation: 0%-25% This is for typical retail investors. Experienced investors or those with higher net worths can take on more risks if they understand them.
- FDs, RDs
- Liquid Funds
- Money Market Funds
- Arbitrage Funds
- Parag Parikh Conservative Hybrid Fund (this will also satisfy the equity allocation)
- Edelweiss CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index Fund
- Equity savings funds can be quite risky and not for everyone. See: What you need to know before investing in equity savings funds
Our recommended fixed-income options for long-term goals only
Equity allocation: 50% – 60% (initially) via index funds.
- PPF (tax-free)
- Arbitrage Mutual Funds (taxed like an equity fund, can be used goals more than 1Y away but do not expect much returns). It is more useful for shifting from equity as the goal deadline nears, especially for non-retirement goals.
- Parag Parikh Conservative Hybrid Fund (taxed like a debt fund)
- Gilt Funds, Corporate Bond Funds (taxed like a debt fund)
- Parag Parikh Dynamic Asset Allocation Fund (contains significant equity, not for everyone; do not use unless you have a large corpus or experience; taxed like other funds). See: Budget 2024 Capital Gains Taxation Guide
Our overall recommendation is to use simple products for both equity and fixed income rather than hybrid funds. These are for those who appreciate risks or have the money to tolerate shocks.
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