Is there a place for high-interest rate fixed income products in a portfolio?

Published: November 12, 2022 at 6:00 am

It is quite easy to see extreme reactions to many aspects of personal money management. Yield-chasing or seeking to invest in high-interest rate fixed income products is no different.

Many investors vehemently believe that there is no place for risk in a portfolio. “We have enough risk from equity, so why take on more risk in fixed income? Debt products should be free from volatility and credit risk” is probably the most popular retail investor sentiment.

This is no doubt the right approach for most investors. Not because of the risk involved in high-yield fixed income but because most investors do not bother to investigate the risks involved.

This is also true of equity investments; many investors are merely riding their luck. In the case of fixed income, the risks are often latent or dormant, like a volcano which can change from a merry tourist site to desolation in a matter of weeks. One day, the product looks nice and rosy, offering higher rates than a “safe bank FD”; another day, you are in despair, fearing loss of principal.

Therefore a combination of “safe fixed income” + “visibly volatile equity” will get the job for all investors, provided they have a goal-based risk management plan to counter the sequence of returns risks.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

That said, it takes all kinds to make the world. We cannot ridicule those who seek higher yields. It is “personal” finance only for those who can personalise it. This means appreciating the pros and cons of our wants/needs and that of the product.

Here are some thumb rules for those who desire higher interest rate products

  1. You must be mentally prepared to lose the amount invested fully or partially. Unlike equity, where one could “wait” for recovery, money lost usually remains that way.
  2. Therefore risky debt should form only part of your debt portfolio. Suppose to wish to take risks to the tune of 10% or 20%, then if your portfolio is valued at Rs. 1000 and 60% of it is debt, the risky debt should be no more than Rs. 60 to Rs. 120.
  3. Whether such a small exposure will make any material difference to your portfolio is something to ponder. If you take on more risk, your health and portfolio will suffer.
  4. Never chase interest rates after retirement unless you have ample wealth to spare.
  5. If someone is offering a higher interest rate, they hope to achieve a profit margin on top of this rate. We should stop and think about how easy it is to achieve this. It is, of course, impossible without significant risks.
  6. Most people forget that we are the lenders in a fixed income instrument. So we need to lend only to those who are financially stable. Therefore yield chasing is similar to stock selection. Just as we would consider the health of a company before buying its equity, we should assess the borrower’s repaying ability, who promises us a high-interest rate.
  7. There are two kinds of risky debt: concentrated and diversified. Concentrated means you are lending your money to a single borrower. Diversified debt means giving the money to an entity that will lend it to several borrowers.
  8. Any corporate FD/bond where a firm wanting funds to grow its business offers a fixed deposit or bond is an example of concentrated debt.
  9. A debt mutual fund or a covered bond is an example of diversified debt. The key difference is that the financial stability of the AMC offering the debt does not (directly) depend on the health of the bonds in the portfolio. The AMC earns money from us for managing the portfolio. If the bonds default, the AMC will not go under.
  10. In a covered bond, the borrower is refinancing debt from us for loans already incurred on its balance sheet. So if the loans go sour, the borrower’s financial health will degrade, and so will its ability to repay us. Yes, the loans are secured in principle. But how liquid is the security? Most collateral is usually not. So in the event of a default, you will get the money back “sometime”. If many loans in the borrower’s pool default, the borrower will sink too. So there is no protection here against loss or bankruptcy, unlike banks. Remember the Jenga blocks presentation from the “Big Short.” A risk dent can be made to look better by pooling.
  11. A healthy corporate entity that directly borrows from you (corporate bond or FD) with a strong track record is a better bet than a covered bond. A debt mutual fund that takes a small credit risk is also a reasonable bet for those who desire higher yields.

In summary, for those willing to take the time to appreciate risks and value asset allocation and diversification, there is always a small place for high-interest rate fixed income products in a portfolio. However, the grim reality is that everyone wants a high rate without research. This is why financial influencers thrive! See: Beware of Finance influencers! They can mess up your portfolio! If you don’t have the time or inclination to understand risks, we recommend staying away from risky fixed income.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)