- 4 months ago
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
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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 nation, what is the first thing about the gift of the child?
01:14bank fixed deposit is a debt investment. So all of us are in that sense beginning our
01:25life with investment in debt. So we are a country of 140 crore citizens and we have
01:33a country where there are 140 crore debt investors. But the way we look at things, we don't look
01:41at it this way. Let 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, the bhaed
01:59bakri and the rest of us. So why do you have always guy and bell associated because
02:05bilk will come from the cow or to feed yourself anaj paida karne ke liye bell chahiye to plow
02:17the field. So you need, the point I am trying to make is that you need a variety of assets.
02:25You need a diversified portfolio and for that you need a bull in the house to plow the field
02:32which will give us the anaj and 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. It doesn't stop there because
02:45we have such a huge perception about how is, you know, the distribution of our portfolio
02:53allocation is. But then if you look at the big picture for the country as a whole, let me
02:59give you some very startling numbers. In the last year, in 2023, which was one of the best
03:06year for equity markets, right? One of the best years for the equity market, the net sales
03:12of equity mutual funds were just about 2,30,000 crores, 2,26,000 crores. These are all the numbers
03:20published by Amphi and Reserve Bank. These are not my numbers. In 2024, which was a very
03:27good year for debt, the net sales of debt mutual funds was only 58,000 crores, right? But in
03:352023, banks got 23 lakh crores of new fixed deposits, new fixed deposits, which is almost 10 times of the money that came to the equity mutual funds. And that's the
03:4710 times of the money that came to the equity mutual funds. And in 2024, banks got about 20 lakh crores of new
03:56deposits. So in the last two years, 45 lakh crores roughly of new fixed deposits have come to the bank. This is all
04:04debt investment. So 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
04:14mutual fund. Now look at the size of the fund, 45 lakh crores of new investment in debt in the last two years, and just about 3 lakh crores of investment in the
04:25organized equity mutual funds. So the higher you go from 35,000 crores, you get a very different picture. Now, if where I started, you know,
04:41these examples, if they don't impress you, and if they don't register the point as to how important is to be able to invest our debt component very wisely, just look at this, right?
04:54Let me give you a real life example of how the debt can change your safety feature and how the equity can change your return
05:04future. So most of us who are in the 40s and 50s have grown up hearing about how the provident fund, employees
05:13provident fund organization, EPFO, always struggled to generate the required return on its portfolio. So every year, you will see
05:23that 50% return return, but EPFO is not able to generate that much return. So the labor ministry will have a meeting. They will request the
05:33finance ministry to give some subsidy so that your provident fund account can be credited with the interest that is to be paid.
05:42And then some wise men in Delhi thought that why not we allow the provident fund organization to invest in equity. So they
05:52started with 5% allocation to equity in 2015. Now what happened from 2015 to 2018, 2019? Gradually, we stopped hearing about the
06:05struggle of the EPFO regarding its target return. EPFO started to generate its own adequate return to be able to
06:17service the provident fund requirement. Now obviously the equity component helped them improve the return on the
06:25portfolio. Then in 2017, they increased the allocation to 10%. Now as we know that by and large, the
06:34EPFO is able to generate adequate return. In fact, they run a little bit of surplus. So now if you read the
06:42newspaper for the last two, three years, there is not a single news item which says that this year EPFO has to
06:48go to the labor ministry who has to recommend to finance minister to pay for the target return. So good. Now if suppose you are at the age of 50, and in the
07:01next 10 years, you are going to retire, you will need to start withdrawing from your provident fund. Or think of someone who is going to
07:15have some requirement for his daughter's marriage or his son's education or any some purpose in the next five years.
07:23Right? Because suppose if you are the person I am asking this, that because the returns have improved, why not increase the
07:33allocation to equity to 50%? Right? Or if I tell you that, why not you invest 100% of your retirement money into equity?
07:45Who will agree to that? Right? Will you agree to invest 100% of your money into equity? No. So that I think is the case for
07:57allocation to debt fund. You need to have some part of your portfolio into debt. You need to have some part of
08:05your portfolio into equity. You need to have some part of your portfolio into real estate, gold. And now if you
08:13talk to people who are 25 or below, they have 100% of their portfolio in Bitcoins. Right? So if I talk to my nephew,
08:23he says, I am only a Bitcoin guy. So there is a new term. So they call themselves BY. BY means I'm a Bitcoin boy. Right?
08:33They don't even think equity is attractive. So here, I think there is a clear case as to why we need to give
08:41allocation to debt. Now, this is another interesting, you know, statistics. Right? So I manage the debt
08:53portfolio for Mirai Asset Mutual Fund. And most of the money that has been invested into our fund is by the
09:01institutions, corporate, large, you know, investors. So think of this matrix, two by two matrix. Right?
09:11You have two types of investors. One type of investors are very wealthy people like, you know, let me say,
09:20somebody like Narayan Murthy or people who have made billions of rupees. So what we call nowadays family offices.
09:27Or you have large corporates like Wipro or, you know, Hindustan Liver. Or you have large institutions like Sid B. Nabard.
09:37So 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. Then you have the small HNIs,
09:52like 5-10 crore net worth of type of people. And 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. Right?
10:14But where do people like family offices, ultra HNIs, corporate institutions invest?
10:21They invest in debt mutual funds. They invest in credit AIFs. They invest in structured products. Right?
10:28So as your wealth level increases and as your understanding of the markets increase, your investment pattern changes. Right?
10:38When you are at 5 crore net worth, you won't invest only in bank fixed deposits or only in equity.
10:45When you are at 500 crore net worth, the again, composition will change.
10:51There's a very interesting statistics that is available that is that the mutual fund distributors who are below, below 10 crore AUM, right?
11:02Below, let'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.
11:26Mutual fund distributors with AUM of 100 to 500 crores maybe have 65, 35.
11:32And 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.
12:01So 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.
12:17There 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.
12:53So Lux used to be a luxury brand for 25 years back.
12:57If you're going abroad, you're 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's 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.
13:43So what is the biggest, you know, grievance that people have?
13:50One 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.
15:11There is another very interesting, you know, 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 that 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 or 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'll also be kicked out.
17:03So 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 that if I need money after two year, three year, five year, I have the ability to get that money.
18:05And how do I maximize the return on my investments 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, it 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, a 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.
19:02First five years is the struggle period where people don't have investable surplus.
19:07People typically start investing from the age of 30 and 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 because at the age of 30, he's going to have little bit surplus, then 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, because 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 is anywhere going to earn 30 rupees more, right?
20:1330,000 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.
20:36So 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.
21:041% extra power of compounding is a mathematical formula.
21:09It applies to everyone.
21:10So 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.
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