Outlook Money 40After40: Why Diversifying Your Portfolio With Debt Is Important? Mahendra Jajoo of Mirae Asset Explains

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.

Debt investments are seen as a way to protect wealth, especially for individuals who have accumulated assets, Jajoo said. According to Jajoo, as people transition from wealth accumulation to wealth preservation, allocating a significant portion of their portfolio to debt becomes important. 

“Once you have created wealth, you start protecting your wealth. That is the stage where the debt becomes so important for your portfolio,” Jajoo said.

“Retail investors, small high networth individuals (HNIs), where do they invest their debt component? They just walk to the nearest bank branch and make a huge deposit, right? But where do people like family offices, ultra HNIs, corporates, institutions invest? They invest in debt mutual funds, they invest in credit alternative investment funds (AIFs), they invest in  structured products,” he said.

“So as your wealth level increases and as your understanding of the markets increase, your investment pattern changes,” he added.

Compounding In Debt Investments

Jajoo also emphasised on the power of compounding in debt investments. “Everyone talks about the power of compounding. Jajoo said, ‘It does not only apply to equity, it applies to everything.”

Even a 1 per cent higher return on a debt investment over a long period (like 30 years) can significantly increase the total returns due to compounding effects, he explained.

“A 1 per cent extra power of compounding is a mathematical formula,” he concluded.