Investors should avoid thinking of debt as a risk-free asset class: Devang Shah of Axis Mutual Fund explains why

Debt is often treated as the low-risk anchor of an investment portfolio, but that does not mean all debt investments carry the same risks. For investors, the right debt allocation can depend on their age, investment horizon, income needs and tolerance for interest-rate and credit risk.

This is particularly relevant as the Reserve Bank of India’s Monetary Policy Committee began its October meeting on Monday. With bond yields around 7.5%, investors are also looking at fixed income more closely, but higher yields do not automatically translate into higher or guaranteed returns.

In an interview with Livemint, Devang Shah, head of fixed income at Axis Mutual Fund, explains how investors should approach debt across different stages of their financial lives, from building a portfolio to planning for retirement.

Edited excerpts:

Q. Investors often treat debt as the “safe” part of a portfolio. Is that framework still adequate, or should investors think about multiple dimensions of debt risk such as duration, credit, liquidity and reinvestment risk?

Debt continues to play the role of a portfolio stabiliser, but investors should avoid thinking of it as a single, risk-free asset class. Different segments of the debt market carry different risks, including interest-rate (duration) risk, credit risk, liquidity risk and reinvestment risk.

This becomes particularly relevant in the current environment. We expect inflation over the next four quarters to average around 5–5.25%, and hence we expect RBI to hike 75–100 bps over the next six to 12 months. In such a market, decisions around maturity profiles, portfolio quality and duration can have a meaningful impact on outcomes.

Investors should therefore focus on selecting the right debt strategy for their goals and time horizon rather than viewing all debt investments through the same lens of safety.

Q. Is the traditional idea of moving almost entirely into fixed income after retirement still appropriate when retirement could last 25–30 years?

Retirement planning today is very different from what it was a generation ago. If inflation averages around 5–5.25%, as we currently expect, retirees need portfolios that not only generate income but also preserve purchasing power over time.