Effective Ways to Build Debt Exposure to attain desired Asset Allocation

A lot of Clients understand the importance of asset allocation being at the core of a solid financial plan. Debt allocation forms an integral part of this as it is the most non-volatile compared to other asset classes. However; the post-tax returns for a lot of instruments are not even inflation beating which discourages a lot of investors from taking the right exposure in debt, especially for investors in the highest tax bracket. Let us look at the returns available for various popular debt instruments:

Table 1: Expected Returns from various debt instruments

Particulars	Interest Rate (pre-tax)	Tax Status - Interest	Post-tax Returns
FD rate Banks	6.5% - 8%	Taxable	4.3% - 5.4%
Senior Savings Citizen Scheme	8.20%	Taxable	5.5%
NBFC FDs	7-9%	Taxable	4.7%-6%
Post Office Monthly Income Scheme	7.40%	Taxable	4.9%
National Savings Certificate	7.70%	Taxable	5.16%
Public Provident Fund (PPF)	7.10%	Non - Taxable	7.20%
Kisan Vikas Patra	7.70%	Taxable	5.16%
Liquid Funds	5-6.5%	Taxable	3.4%-4.3%
Gilt Debt Fund	6.5 - 8%	Taxable	4.3%-5.4%
Corporate Debt Funds	6.5 - 8%	Taxable	4.3%-5.4%
RBI Bonds	8%	Taxable	5.4%
LIC Schemes	6-6.5%	Non - Taxable	6-6.5%

As can be seen in the table, the post-tax returns for an investor in the highest tax slab are low and cannot even beat inflation for most products. For people in highest tax brackets, their lifestyle inflation could be as high as 8% to 10% on certain luxury products. In such a situation investing in these products is equivalent to destroying wealth. Let us explore what can be done to ensure adequate debt exposure as well as getting slightly better inflation beating returns.

If liquidity is not the key criteria, then the following options are available:

1)      Employee Provident Fund: An investor can voluntarily increase his contribution to employee provident fund to upto 100% of basic salary plus dearness allowance. However this is capped at INR 2.5 lakhs per year to employee’s contribution, beyond which the interest becomes taxable. If you are in the highest tax bracket already, there are high chances your contribution is already close to or exceeds INR 2.5 lakhs.

2)      Public Provident Fund (PPF): INR 1.5 lakhs contribution each year is allowed. PPF will have a 15 year lock-in. I consider this more of a benefit since it ensures money is locked in for future needs or goals. A person can use his and spouse’s account to increase contribution beyond INR 1.5 lakhs.

3)      Sukanya Samriddhi Yojana: In this scheme you can make 8.2% tax-free returns if you have a girl child.

4)      NPS: Investor can choose 100% investment in government securities or corporate debt. The downside being you cannot withdraw 100% of the invested amount at retirement.

If you do not want to tie up capital for a long duration, the following options are available:

Hindu Undivided Family (HUF): HUF is a separate entity that can be established by Hindu, Sikh families to carry on family business or build family assets. Since HUF is a separate entity and has its own PAN, tax exemption of upto INR 4 lakhs is available. Income from fixed deposits upto INR 50 lakhs could be totally tax exempt. Building capital in HUF may take time and clubbing provisions need to be taken care of. However; in the long run, setting up a HUF can be beneficial.

Investing in spouse’s name: If wife is not earning or is earning but not in highest tax bracket, debt exposure can be taken through spouse’s account. However; clubbing rules will apply and hence wife’s existing capital or future earning can be used to take debt exposure.

Investing in Parent’s name: If parents are retired and have no or limited income, a gift can be made to parents which in turn can be invested in debt products. Senior citizens also get higher interest rates on fixed deposits. I recommend this option only if you are the sole child, if you have siblings there could be issues during inheritance even if there are nominations and a will in place.

Investing in minor child’s name: Debt exposure can be taken in minor’s account to avoid capital gains tax upto the child becomes a major. However, do not invest in income generating products like a fixed deposit because that income would be clubbed with the parent in the higher tax bracket.

Conservative Hybrid Mutual Funds: If none of the other options discussed are viable, investors an invest in a conservative hybrid mutual fund rather than a pure debt fund. These funds have given pre-tax returns of 9-11% per annum. These funds have upto 25% investment in equity and hence are more volatile; however post 1 year of investment, they would hardly give negative returns.

Final Thought

Debt isn’t just about returns — it’s about stability, diversification, and predictability.

But for high-tax-bracket investors, being thoughtful about where debt sits can make the difference between beating inflation and building wealth.

Disclaimer- This is not a recommendation to invest in any of the instruments mentioned in the article. Nothing in the article is my solicitation, recommendation, endorsement, or offer. If you have any doubts as to the merits of the article, you should seek advice from an independent financial advisor. or tax advisor. Registration granted by SEBI, BASL membership, and NISM certification does not guarantee the intermediary’s performance or provide any assurance of returns to investors. Investment in the securities market is subject to market risks. Read all the related documents carefully before investing.