This is my third and final post on debt series, to read previous ones click here and here
In this last post on Debt investments, I would cover allocation or in Simple words – How much of the portfolio should be in invested in debt instruments
Situation 1 – I know I need to double my portfolio in 6 years after paying taxes so that I can meet my personal needs
Here you know the target return on investment, i.e. 12% pre-tax on a compounded basis to double your portfolios in 6 years. Now first one has to understand on an average historical basis how much debt and equity has returned. In India if look at last ten years data
Debt has given approximately 9% pre-tax return that equates to post tax return of 7.2% ( Assuming you pay 20% income tax)
Equity has given approximately 14% post tax return
Based on above one has to invest 70% in equity and 30% in debt to achieve their goal of attaining 12% pre-tax compounding return
But should you get obsessed with past performance? Understand past is not a guarantee of future performance, however one has to start somewhere and the best … Read the rest