Debt instruments will not make you rich…
All of us must have some debt investments. At least that is what ‘asset allocation’ gurus will make you believe, so well, let us believe it.
1. Debt instrument preserve your money: they preserve it exactly as it was! It does not grow in a debt instrument.
2. The ‘interest’ that you get in a debt instrument is equal to or less than inflation: Over a long period of time the interest is equal to inflation, that is all. That means the money is preserved, if at all.
3. The interest that you receive, howsoever meagre is taxed at regular rates: So if you are a tax payer a small part of the interest received is lost to taxation. In fact the bank may deduct about 10% tax, and the balance tax will have to be paid by you as an advance tax.
4. The impact of the taxation is so bad that the compounding over a long period of time is lost – or its impact reduced.
Moral of the story: Keeping your money in a debt instrument is for preserving it and not for growing it. You get rich only when your money grows, not when it gets preserved.
However while keeping in debt instruments you can do the following:
1. Keep it in an income deferred way: thus you postpone your income to the time that you withdraw and
2. Convert the income from a regular income to a capital gains kinda income.
These two steps ensure that the debt portion of your money also grows at a reasonably faster rate than a bank fixed deposit.
source:www.subramoney.com