Debt: Debt exposures can be taken through mutual funds (Debt schemes), corporate bonds or Bank deposits. Corporate bonds offer higher return due to default risk. If the corporate makes losses, the interest payment becomes uncertain and even the refund of principal may be doubtful. But the return of principal and payment of periodic interest is certain in case of Bank deposits and so risk free. But the post tax return may be lower than inflation and will provide negative real rate of return. It carries inflation risk. Liquid Funds are better than Bank deposits. It is advisable to invest in Debt for short term goals. Asset allocation The return on investment of each of the asset class may not move in same direction and hence it is advisable to remain diversified. If you face negative return in one asset class, it may get compensated by positive return in another asset class. The greatest investor Warren Buffet says: “Do not put all your eggs in one basket” Risk Profiling The willingness of each individual to take risk varies. All most everyone wants to gain in the market but many have aversion for loss. The market is uncertain and one can aim to gain only when one is willing to take risk. Further there is another dimension to risk .i.e. ability to take risk. Someone starting his career and without dependents can take higher risk but one who has retired and have limited corpus cannot take risk since in the event of market going down, the hard earned money will be lost. Need to take risk The financial planners take the considered view on risk taking by judging whether there is a need to take risk. If the financial goals can be achieved without taking any risk, the planner may recommend higher debt allocation. But if the goals can be achieved only with higher return, the planners consider exposures to equity having consideration to goal horizon. Analogy If you want to walk 5 kms in the morning, go by foot or cycle; if you want to travel 100 kms, use car or bus; If you want to travel 500 kms, use train, if you want to travel 1000km;use aeroplane. Similarly for emergency, use liquid mutual fund; for one year, use debt, for 3-5 year use balanced fund and for more than 5 years use diversified equity fund.