The best thing about human beings is that they stack so neatly. Spoken by actor Kevin Spacey, who plays US president Frank Underwood in the Netflix hit House of Cards, these words may spring to mind when you think of the conditions that pervade the fixed-income market. Replace “human beings” in the quote with “retail investors”, and you will cotton on to the imagery.

The common man who is currently pursuing opportunities to invest in deposits and debentures is, on this brilliant Monday morning, in a quandary. He is struggling to find the answer to a vital question — in a scenario marked by rising interest rates, should he allocate to high-yielding but poorly rated instruments? His query is perfectly timed too, for a good number of such securities have hit the market in recent days, each vying with the others to gain a fair share of the investor’s wallet.

It may not be quite fair to identify some of the more modestly rated papers publicly, but a quick example appears in the shape of a leading financial services firm that is currently raising money with an NCD. The latter, which will offer rates close to 10 per cent, indeed has a poor rating – AA minus with a negative outlook.

Aspiration over fear

The question that I wish to raise in this connection is simple. Why should an ordinary investor consider such a proposition at all? Will his aspiration (well, dus taka a year on every hundred invested does seem terrific!) outweigh his fear of default? The latter, as everyone will agree, has been a bane for our markets. There have been a number of cases in the recent past where corporate issuers have turned tail — several of them have been high-profile companies, each trusted by masses of investors.

The point is well taken by most participants; some quarters, however, are still willing to stick their neck out and indulge in a few risky bets. For them, the biggest draw is the superior yields these issues promise to deliver over stipulated time periods. The fact that ratings may be relatively inferior — the one in our example has a negative outlook — is not a deterrent for the risk-taker. Therein lies the rub.

Taking risks

Risk-taking is not a zero-sum game, as some sections tend to believe. It has its points, its latent advantages, especially for those who are smart enough to pull it off in style. The average bank deposit, despite successive changes in the repo, is still in the nether world. Certain corporate deposits, including those proffered by financial services companies (home mortgage players included), are in better shape.

Some categories currently offer 7.25-7.50% or so if the investor is willing to stretch his time period a bit more than usual. Small finance banks, still viewed as newbies in the banking space, tend to offer rates that are somewhat more attractive than their older, larger counterparts. All in all, 7 per cent seems to be the usually accepted metric for most quarters for the time being.

I state this to highlight a significant point. When retail inflation is 7 per cent (measured by Consumer Price Index, its latest score was released by the government last week), can the average investor really stay calm and content? Does it make sense for him to be in the assured-income market at all when the impact of rising prices is evidently so horrific? It really does not, and aspiring investors are quite aware of the fact that inflation has a debilitating impact on their wealth.

New recipe

Ergo, a different tack must be adopted, and a new recipe for the tired old palate is warranted. Investors may well find the following factors worth considering:

This may be time for the common investor to move from debt to equity, at least gradually, provided his risk profile permits such a change.

Within the debt space, allocating to credit-risk funds (or securities that run the risk of default) may be expressly avoided. As things stand, investors should not go long at this juncture. Short-duration options are the preferred mode insofar as the current phase of the market is concerned.

Within the equity space, if the investor has no time for direct investment in stocks (well, going direct in the stock market is not for the faint-hearted), succour will come to him in the shape of equity funds.

The point to note is that fund management companies have all manners of products — diversified and sectoral, actively managed and passive index-based, equity-only and hybrid. The sheer variety of products can be overwhelming for the uninitiated. Debt funds are no less diverse, their range spans overnight and money market funds to long-term income and gilt funds.

Portfolio makeover?

For a large number of investors, a classic ‘portfolio makeover’ — yes, a much-abused term, I admit — may be necessary. Most fixed deposits these days seem to appear as the worst sort of dumb products ever conceived in the market. There is a strong case, therefore, to try out other asset classes. These will no doubt be riskier, yet the same ones may also deliver smarter results. Take equities, for instance. Volatile in the short term, definitely. But when it comes to stocks, positive longer-term performance is the show-stealer.

Nothing, of course, is guaranteed in the case of assets such as stocks, gold or real estate. So the fixed-income hardliner will still want some exposure to bonds, g-secs, deposits and the like. A diversified cocktail of assets (in keeping with one’s risk tolerance) is what is being prescribed by most professional advisers. Their rationale is well-known too. If one asset class sinks to a low, a combination of the other classes will sustain a portfolio.

Benign advice is indeed meaningful if you listen to it. And follow it one step at a time in order to build a solid portfolio. As a whacky quip heard in House of Cards goes, “First, you must learn to pull an oar. Only then can you take the helm.”

Writer is director, Wishlist Capital Advisors