Summary of this article
Riddham Lakhani calls debt the “mother” of every investment portfolio
Retail investors can now access bonds with investments starting from Rs 10,000
Inflation makes real returns and regular income important for investors
Fixed income should be treated as an essential part of every investment portfolio as it provides predictable income and helps investors plan for different financial goals, said Riddham Lakhani, AD, The Fixed Income. Drawing a Bollywood reference from the Amitabh Bachchan-starrer Deewar, Lakhani compared debt to the “mother” in a portfolio, echoing the film’s famous “Mere paas maa hai” dialogue. “In the context of a portfolio, that ‘mother’ is debt. Everyone must absolutely have debt in their portfolio; it is essential,” he said.
Speaking at Outlook Money’s The Money Question event in Mumbai, Lakhani highlighted how inflation, changing interest rates, and evolving investor needs have made fixed income more relevant, while explaining how the primary and secondary bond markets work.
Bonds Remain Underused
Lakhani said fixed income has historically received less attention from investors, with the investment industry focusing heavily on equities and mutual funds. He said advisors often recommend a single product for different financial goals instead of first understanding what the client actually needs.
“Instead of chasing true alpha, the industry started chasing products, effectively marrying the product rather than the solution,” he said.
He also pointed to changing consumer behaviour among younger investors. A 25-year-old may not want to wait 15 years for an investment goal and may instead have shorter-term financial requirements, he said. This makes matching investments with specific goals and time horizons important.
Bond Market Becoming More Accessible
According to Lakhani, the bond market was largely dominated by institutional investors until a few years ago, with transactions often involving ticket sizes of Rs 5 crore to Rs 20 crore. Retail participation has since become easier, with investments possible with amounts as low as Rs 10,000.
“In its simplest form, the bond market is just the business of lending money,” he said.
He explained that investors can earn periodic interest from bonds and receive the principal at maturity. The primary market involves lending directly to a borrower when the bond is issued, while buying an existing bond from another investor takes place in the secondary market.
Lakhani also explained how falling interest rates can increase the value of an existing bond offering a higher coupon. The difference between the purchase price and the bond’s cash flows determines the investor’s effective return, or Yield to Maturity (YTM).
Inflation Makes Real Returns Important
Lakhani stressed that investors should look beyond the nominal return on their investments and consider inflation. He said average inflation over the past 35 years was around 7 per cent, while average bank fixed deposit (FD) returns were about 8.45 per cent. Over the more recent five-year period, he put average inflation at around 4.5 per cent and FD rates at about 6.25 per cent.
He said the relatively narrow gap leaves investors with limited real returns from traditional fixed deposits, particularly when expenses rise faster than headline inflation.
Lakhani also used a retirement example to illustrate the impact of yields. A retiree with Rs 2 crore and monthly expenses of Rs 1 lakh could see those expenses rise to around Rs 3.03 lakh in 20 years if inflation averages 6 per cent. A higher-yielding bond portfolio, he said, can provide greater cash flow and potentially extend the period for which the corpus can support expenses.
Know The Risks Before Investing
Lakhani discussed different fixed-income instruments, including government securities, state-backed bonds, PSU bonds, corporate bonds, tax-free bonds, zero-coupon bonds and perpetual bonds.
He also explained the role of credit ratings in assessing corporate borrowers, with ratings such as AAA, AA and A indicating different levels of credit quality.
“People frequently ask us for alternative investments outside of equities. They want capital protection or a fixed monthly income. The answer to all these requests is fixed income,” Lakhani said.
