Should EPF and gratuity be included as debt while calculating asset allocation?

Published: January 30, 2024 at 6:00 am

A reader writes, “I am a subscriber to the freefincal newsletter. They have been very insightful. Portfolio rebalancing is very easy to understand but equally difficult to implement, it needs a lion’s heart to move from equity to debt. I have one question about what can be treated as debt”.

“I have been investing in mutual funds through SIPs (equity funds like Flexi cap, Multicap and large cap). I also have some exposure to equity shares and gold. As of today, the proportion is:

  1. Equity MFs – 39%
  2. Equity – 30%
  3. Debt MFs – 26% (Short term debt, money manager and a PSU debt fund)
  4. Gold – 5%

So, the allocation is roughly 70% equity and 30% debt + gold.

I have been working in a private firm and contributing to EPF. I also have a gratuity scheme offered by my employer. Kitty in both these are considerable. Considering EPF and gratuity as debt, the allocation becomes 40% equity and 60% debt + gold.

In such a case, should I consider EPF and the gratuity portion as debt and move from debt funds to equity to make it 70:30 again? Or should I not consider EPF and Gratuity as debt altogether? My age is 45 for reference.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

At the outset, this might seem like a “trivial” question to some readers, but you would be surprised how many times I have been asked this over the years.

Any fixed income instruments meant for a specific goal (in this case, retirement) should be considered as “debt” and included in the asset allocation calculation.

At age 45, an asset allocation of 40% equity is quite reasonable. Most people have much less since they start investing late in equity, whereas EPF gets deducted from the day they start working.

What should be done now is entirely contextual.

In my case, I started investing in equity soon after starting work (within two years) and invested much more in the asset class than my mandatory NPS contributions. So at age 48, I maintain about 60% in equity and 40% in NPS, Gilt Funds and PPF. I have explained the reasons for this here: why are you holding 60% equity for retirement? My primary reasons are I have already achieved financial independence, and my retirement is far away.

Only a SEBI-registered fee-only advisor can offer you the necessary contextual advice after considering your circumstances. I can only offer you the following general recommendations.

I don’t see any need for you to redeem your debt funds and shift them to equity. You already have 40% equity, which is only about 10% less than a well-balanced portfolio. See: Will Benjamin Graham’s 50% Stocks 50% Bonds strategy work for India?

Assuming you have about ten years to retire, you can leave the equity allocation at 40% or increase it to about 50% with fresh investments in the next couple of years.

More crucial is how you intend to de-risk the portfolio before retirement. That is, reduce equity allocation, as shown in several illustrations based on the freefincal robo advisory tool.

From this point of view, 40% equity is a good number, provided your corpus is large enough, and you are investing enough for retirement. This happens if the amount you need to invest is lower than the amount you are investing. If this is not the case, then a 5% to 10% increase in equity should be okay, but keep in mind that it cannot be maintained at that level for long and should be gradually reduced, as shown in the above illustrations.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)