Mahendra Kumar Jajoo, Chief Investment Officer (CIO) - Fixed Income, Mirae Asset Investment Managers (India), spoke about the role of debt in portfolio diversification at the Outlook Money 40After40 on February 7.
Jajoo emphasised the importance of diversifying portfolios with debt investments to ride market volatility smoothly. Jajoo noted that for a typical Indian household, debt constitutes about 60 per cent of the overall portfolio.
Read more: https://www.outlookmoney.com/retirement/invest/outlook-money-40after40-why-diversifying-your-portfolio-with-debt-is-important-mahendra-jajoo-of-mirae-asset-explains
Jajoo emphasised the importance of diversifying portfolios with debt investments to ride market volatility smoothly. Jajoo noted that for a typical Indian household, debt constitutes about 60 per cent of the overall portfolio.
Read more: https://www.outlookmoney.com/retirement/invest/outlook-money-40after40-why-diversifying-your-portfolio-with-debt-is-important-mahendra-jajoo-of-mirae-asset-explains
Category
📚
LearningTranscript
00:00At a time when everyone is, you know, smitten with equity and everyone wants to hear about
00:11equity and just after the lunch, I think it's a very challenging thing to talk about debt.
00:18But I'll try to do my job and the topic is the importance of debt in asset allocation.
00:30So, you know, when you talk about debt, we are talking about the all of India.
00:40We are sitting in the heart of Mumbai, the financials now center of the country.
00:46But then if you look at the overall big picture, Indians have always been very big investors in debt, right?
00:54And the investment for debt for every one of us starts from the day we are born, right?
01:02Let me tell you that whenever there is a child born in any family, right?
01:08After the name of the birth of the children, it happens to be the first thing they are saying
01:12What happens when the gift comes to someone's name is a debt investment in a bank, right?
01:19Bank fixed deposit is a debt investment.
01:22So all of us are in that sense beginning our life with investment in debt.
01:27So we are a country of 140 crore citizens and we have a country where there are 140 crore debt investors.
01:37But the way we look at things, we don't, you know, look at it this way.
01:42Let me give you another example of what is the importance of debt in our portfolio.
01:48So, you know, our ancient system, the typical rural household, the guy, the bell, and the rest of it.
02:02So why do you have always guy and bell associated?
02:05Because milk will come from the cow.
02:11Or to feed yourself, anaj paida karne ke liye bell chahiye to plow the field.
02:17So you need, the point I'm trying to make is that you need a variety of assets.
02:24You need a diversified portfolio.
02:26And for that you need a bull in the house to plow the field which will give us anaj.
02:33And you need the cow to give the milk which can feed the kids.
02:38If you don't have either, then your household is not complete.
02:43It doesn't stop there because we have such a huge perception about how, you know, the distribution of our portfolio allocation is.
02:54But then, if you look at the big picture for the country as a whole, let me give you some very startling numbers.
03:02In the last year, in 2023, which was one of the best year for equity markets, right?
03:09One of the best years for the equity market, the net sales of equity mutual funds were just about 2,30,000 crores, 2,26,000 crores.
03:19These are all the numbers published by Amphi and Reserve Bank, these are not my numbers.
03:24In 2024, which was a very good year for debt, the net sales of debt mutual funds was only 58,000 crores, right?
03:35But in 2023, banks got 23 lakh crores of new fixed deposits, new fixed deposits,
03:45which is almost 10 times of the money that came to the equity mutual funds.
03:50And in 2024, banks got about 20 lakh crores of new deposits.
03:56So in the last two years, 45 lakh crores, roughly, of new fixed deposits have come to the bank.
04:04This is all debt investment.
04:05So when we talk of debt, we don't think of the bank fixed deposit or the LIC or the pension scheme as investment in debt mutual fund.
04:14Now look at the size of the fund, 45 lakh crores of new investment in debt in the last two years,
04:21and just about 3 lakh crores of investment in the organized equity mutual funds.
04:26So the higher you go from 35,000 crores, you get a very different picture.
04:35Now, if where I started, you know, these examples, if they don't impress you,
04:43and if they don't register the point as to how important it is to be able to invest our debt component very wisely,
04:52just look at this, right?
04:54Let me give you a real-life example of how the debt can change your safety feature
05:01and how the equity can change your return feature.
05:04So most of us who are in the 40s and 50s have grown up hearing about how the Provident Fund,
05:12Employees Provident Fund Organization, EPFO, always struggled to generate the required return on its portfolio.
05:21So every year, you will see that .
05:26But EPFO is not able to generate that much return.
05:29So the Labour Ministry will have a meeting.
05:32They will request the Finance Ministry to give some subsidy
05:35so that your Provident Fund account can be credited with the interest that is to be paid.
05:42Then some wise men in Delhi thought that why not we allow the Provident Fund Organization to invest in equity.
05:51So they started with 5% allocation to equity in 2015.
05:57Now what happened from 2015 to 2018, 2019, gradually we stopped hearing about the struggle of the EPFO regarding its target return.
06:12EPFO started to generate its own adequate return to be able to service the Provident Fund requirement.
06:20Now obviously the equity component helped them improve the return on the portfolio.
06:26Then in 2017, they increased the allocation to 10%.
06:31Now as we know that by and large, EPFO is able to generate adequate return.
06:38In fact, they run a little bit of surplus.
06:41So now if you read the newspaper for the last 2-3 years, there is not a single news item which says that this year EPFO has to go to the Labour Ministry
06:50who has to recommend to the Finance Minister to pay for the target return.
06:56So good.
06:57Now if suppose you are at the age of 50 and in the next 10 years you are going to retire,
07:04when you will need to start withdrawing from your Provident Fund.
07:10Or think of someone who is going to have some requirement for his daughter's marriage or his son's education or any purpose in the next 5 years.
07:23Right?
07:24Because suppose if you are the person I am asking this, that because the returns have improved, why not increase the allocation to equity to 50%?
07:36Right?
07:37Or if I tell you that why not you invest 100% of your retirement money into equity?
07:45Who will agree to that?
07:47Right?
07:48Will you agree to invest 100% of your money into equity?
07:53No.
07:54So that I think is the case for allocation to debt fund.
07:59You need to have some part of your portfolio into debt.
08:04You need to have some part of your portfolio into equity.
08:07You need to have some part of your portfolio into real estate, gold.
08:12And now if you talk to people who are 25 or below, they have 100% of their portfolio in Bitcoins.
08:20Right?
08:21So if I talk to my nephew, he says I am only a Bitcoin guy.
08:26So there is a new term.
08:28So they call themselves BY.
08:30BY means I am a Bitcoin boy.
08:32Right?
08:33They don't even think equity is attractive.
08:36So here I think there is a clear case as to why we need to give allocation to debt.
08:43Now, this is another interesting, you know, statistics.
08:49Right?
08:50So I manage the debt portfolio for Mirai Asset Mutual Fund.
08:56And most of the money that has been invested into our fund is by the institutions, corporates, large, you know, investors.
09:06So think of this matrix, two by two matrix.
09:10Right?
09:11You have two types of investors.
09:13One type of investors are very wealthy people like, you know, let me say somebody like Narayan Murthy or people who have made billions of rupees.
09:24So what we call nowadays family offices.
09:27Or you have large corporates like Wipro or, you know, Hindustan Liver.
09:32Or you have large institutions like Sid B and Abad.
09:36So you have that type of investors who have made a lot of money and who need to protect their wealth.
09:44And then you have the regular investors, the, you know, retail investors.
09:49Then you have the small HNIs like 5, 10 crore net worth of type of people.
09:55And on the right hand side, you see where they invest.
09:59So the retail investors, the smaller HNIs, where do they invest their debt component?
10:06They just walk to the nearest bank branch and make a fixed deposit.
10:12Right?
10:13But where do people like family offices, ultra HNIs, corporates, institutions invest?
10:20They invest in debt mutual funds.
10:23They invest in credit AIFs.
10:26They invest in structured products.
10:28Right?
10:29So as your wealth level increases and as your understanding of the markets increase,
10:36your investment pattern changes.
10:38Right?
10:39When you are at 5 crore net worth, you won't invest only in bank fixed deposits or only in equity.
10:46When you are at 500 crore net worth, again, composition will change.
10:51There's a very interesting statistics that is available that is that the mutual fund distributors
10:58who are below 10 crore AUM, right?
11:03Let's say below 100 crore AUM, their allocation to equity is the highest.
11:08Then the mutual fund distributors who are between 100 to 500 crore, their allocation to equity and debt is more diversified.
11:17So let's say distributors with the net worth, AUM of up to 100 crore might have 80% in equity, 20% in debt.
11:26With different distributors with AUM of 100 to 500 crores maybe have 65, 35, and people who have more than 500 crores AUM are more like 50-50.
11:36So, the more money you have to invest and the more knowledge you have, your allocation will change.
11:43So, therefore, there is a time when you are earning and then there is a time when you start protecting your wealth.
11:52Once you've created wealth, you start protecting your wealth.
11:55That is the stage where the debt becomes so important for your portfolio.
12:02So, if you want to decide, I mean if you decide to invest in debt, where should be investing in the debt, you know?
12:10One is that you can make fixed deposit with the banks, which is the simplest thing which everyone does.
12:17So, there is an explosion in what kind of products we have in capital markets now.
12:25So, 25 years back, if you go abroad and you come back, the shopping list will have luxury soaps, you know, and perfumes and all those kind of things.
12:39But now, when you go abroad and when you come back, your shopping list is not the soaps, perfumes and all that.
12:46Now, you buy high-value watches or things like that.
12:50So, there are a lot of new products.
12:52So, Lux used to be a luxury brand for 25 years back.
12:57If you are going abroad, you are buying a Chanel perfume.
12:59But nowadays, all these things are available to the mall next door.
13:03Similarly, when we were growing up, the banks were the only place where you can put your debt money.
13:09Otherwise, you go to LIC or you go to, you know, one of those products.
13:14Now, what is the difference between a product where you make the choice and there is a product which is offered to you?
13:22So, when you invest in a debt mutual fund, we generate whatever is the portfolio return and pass it on to the investor with whatever little fees that we charge.
13:33But when you go to a bank to make a fixed deposit, the bank is pricing the deposit as per their convenience and not for your convenience.
13:44So, what is the biggest, you know, grievance that people have?
13:51One of the biggest grievance that I know of when I speak to people is that when the interest rates go up, what goes up is my home loan rate, not my deposit rate, right?
14:05And vice versa, when the interest rates come down, what comes down is my FD rate and not my home loan rate, even though I have taken a floating rate loan, right?
14:22But in mutual funds, if you invest, whatever is the portfolio return that is passed back to you.
14:30So, these are the different types of debt funds that you have.
14:34So, you can choose from different combinations of different maturity horizon and different product composition.
14:44So, typically in fixed income, the classic approach is that the longer the maturity, the higher is the volatility.
14:53And therefore, if you are a long term investor, then you will go for the long bond fund and if you are a short term investor or if your money is available for a very short period of investment, you will only invest in the short term funds.
15:11So, there is another very interesting opportunity which is available with credit funds.
15:18So, credit is always a little bit of a risky category because there are a lot of people who will be willing to borrow from you at the rate of 20%, right?
15:29So, if you just go out of this room and talk to any of your relatives, many of them who are your people, who you, you know, have trust on, will be willing to borrow at Pandra Taka, Solar Taka.
15:41But then, when you are lending money, when you are investing in debt, one of the risks you have is that the money does not come back.
15:49So, if you lend money to someone who doesn't pay, then whatever return calculation you make is of no use because your return is zero.
15:56And therefore, it is very important to take credit risk with a lot of care.
16:02Now, what is the basic principle in taking credit?
16:06That the longer you invest for, the less is our ability to understand what will happen in future.
16:15So, suppose if I look at a company like, let's say today, let's say L&T is one of the largest corporate in India today.
16:25So, if you take a 20-year view, do we know what will happen to any company after 20 years?
16:31Because if you look at Nifty today, the composition of Nifty 50 is, is it the same as it was five years back?
16:41Or is it the same that it was 10 years back?
16:45So, there are two reasons there are changes in Nifty 50, right?
16:49One is, if a company does very well, it will push out someone.
16:53And if a company, so it's like the Indian cricket team, if somebody does very well, he will push out someone.
17:00But if someone doesn't do well, then he will also be kicked out.
17:04So, there are a number of companies in Nifty 50 which have gone out of the index because they have not done well.
17:09And then we have the memory of ILFS which happened in 2018 or DHFL, you know, episode where all of you suffered.
17:18So, the basic principle for investing in credit is that if you are investing for very long term, don't take credit risk because you don't know what will happen over a longer time period.
17:30Or our ability to forecast future for a very long time is very poor.
17:35The second is that never invest in credit because you are getting higher rate.
17:41First, you have to be comfortable with the credit and then the interest rate that you get comes second, right?
17:48So, now you need to have a good combination in your portfolio where you have good staggering of your portfolio.
17:59portfolio that if I need money after two year, three year, five year, I have the ability to get that money.
18:06And how do I maximize the return on my investments?
18:09Because, sorry, because all of us talk about the one, you know, very basic principle of investing.
18:18That is the power of compounding, right?
18:22Everyone talks about power of compounding.
18:25Now, let me tell you something that power of compounding is a mathematical formula, right?
18:31It does not apply only to equity.
18:33It applies to everything which grows, right?
18:37So, if you invest in debt, now typically for an Indian household, the investment in debt is about 60% of the portfolio, right?
18:4860% of the portfolio.
18:49So, think of this.
18:51A typical investor has a 30 year investment duration, right?
18:55Because you, you know, become an MBA or chartered accountant or doctor by the age of about 25.
19:01First five years is the struggle period where people don't have investable surplus.
19:07People typically start investing from the age of 30.
19:11And then they invest up to 60.
19:13So, 30 to 60 is the typical investment life of a regular Indian individual.
19:23And also the, you know, as the age increases, the investment increases.
19:31Because at the age of 30, he's going to have little bit surplus.
19:35Then he'll get married, have kids, buy a house.
19:38So, typically at the age of 40, 45 is when people start having serious money to invest in debt.
19:46Because debt you start investing when you have made wealth.
19:50So, if over a period of 30 years, on your debt investment, if you make 7% return versus 6% return, you get a compounding impact for 30 years.
20:03So, 1 lakh rupees invested for 30 years, earning 1% extra interest.
20:08Is anybody going to earn 30 rupees more, right?
20:1230,000 rupees more.
20:14So, if you are careful with your debt investment, then you can earn 30% more without compounding of that interest for the investment life that you have of 30 years.
20:25So, if you start with 100, and suppose at the rate of 6%, it becomes 200.
20:32At the rate of 7%, it will become 230.
20:35So, therefore, you earn 30% more by just being a little more careful in your investing.
20:42I have seen people invest two hours before going to a restaurant and trying to understand what is the rating of the restaurant, what is the comparison, you know, pricing.
20:54But when people invest in debt, what they do, particularly when they invest in debt, is walk to the nearest bank branch and make a FD.
21:03Please don't do that.
21:05So, 1% extra power of compounding is a mathematical formula.
21:09It applies to everyone.
21:11So, these are the different types of investments you can do.
21:14But I think the point has been made that debt is an essential component of our portfolio.
21:20And when you invest in debt, it also gives you the power of compounding.
21:24So, be very smart with your debt investments.
21:26Thank you so much.
21:27Thank you so much.
21:28Thank you so much.
21:33You