I have a long term horizon and I'm convinced to invest in equity. But I don't have debt exposure in my portfolio. So therefore, should I invest in an aggressive hybrid fund just to get some debt exposure?
-Ajay
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Ideally, that is a very good starting point and very tax-efficient way but you should not. We need debt for two to three reasons. One is the emergency fund. The money which you might need in an emergency and it should be invested in a manner that it is not exposed to any market risk. So that is an absolute sum. It is not a percentage of your total because your networth could be anything. It is up to you whether you need Rs25,000, Rs50,000 or a lakh as emergency fund. It depends on your situation. If you have small children or old parents your need for the emergency corpus would be higher.
The other need for fixed income in your portfolio is to have a percentage so that you can rebalance. If you are convinced of equity and have decided to invest in it, 10 per cent of your money should be in fixed income. So that, if equity goes up substantially, you are able to take out a little bit of it and put it in fixed income, which will never go down in value. So you are able to de-risk your portfolio a little bit.
But you can do without it in your early years. As you get closer to your retirement or at any stage when you need to really work in a manner that you are likely to consume it in a foreseeable future, say, one year, two years or three years timeframe. That is the time when you should start moving your money partially into fixed income.
So you should have fixed income for rebalancing. You should have it for the emergency fund and you should start moving to fixed income depending on when you need the money.