50-Minute BOND INVESTING Masterclass: How to Choose Bonds That Beat Equity in a Falling Market
Executive Summary
With the Sensex and Nifty near 52-week lows and FDs losing to inflation after tax, Ganeshprasad sits down with Girish Lakhotiya, founder of Prachay Capital, for a full masterclass on India's bond market. Girish's diagnosis of the equity side: 85% of today's investors entered post-COVID (demat accounts went from 4 crore to 24 crore), watched Nifty triple from 7,600 to 23,600, and anchored on 'supernormal' returns - while the 30-year reality is 11-12% (13-14% with dividends), SPIVA found 90% of fund managers fail to beat the market, and even Rakesh Jhunjhunwala said 'if I get 18% return, I'll treat myself as a king.' His FD math: 6% interest minus 30% tax leaves 4.2% against 5-6% inflation - a guaranteed loss. His portfolio answer is the SGS framework: Security (liquid emergency assets), Growth (10-20% return assets like equity), Stability (regular cash-flow assets) - and bonds are the missing stability piece in most Indian portfolios. The bond masterclass: equity and bonds are 'brothers' - owners versus lenders; three bond categories (government/quasi-government 5.5-8.5%, AA/AAA 8-10%, below-AA investment grade 10-15%); 94% of Indian issuances are AA/AAA and only 2% of bond investors are retail; the CAMEL model (Capital, Asset, Management, Earnings, Liquidity) is how rating agencies grade debt; and the 'anything below AA is junk' psychology came from 1980s Michael Milken-era America plus Indian regulations that bar institutions from sub-AA paper - even though BBB-minus is investment grade and banks already lend to those same companies. His model at Prachay: subscribe the entire bond issue as an NBFC, retain 15-20% till maturity as skin in the game, then resell to retail on their Bondsmart platform - 'don't trust the rating itself, trust that we believe in the business.' On defaults: ILFS investors recovered ~60%, DHFL ~33%, because most bonds are secured and bondholders rank senior to equity - 'first the equity will get wiped out.' His red flags: unsecured bonds, weak ratings, and promoters without demonstrated ability and willingness to pay. For founders: bonds beat banks when you lack family collateral (Indian banks are collateral-driven beyond primary security), when you've exhausted bank limits, or when you're loss-making and banks won't lend - but you need listed-company-grade compliance first. His closing message: bonds are 'empowerment instruments' - financial freedom for investors through passive income, for borrowers through independence from traditional banking, and for the country through direct channelization of investment into business.
Key Takeaways
The FD trap is arithmetic, not bad luck
6% FD interest minus 30% tax leaves 4.2% against 5-6% inflation - a guaranteed real loss. Girish's point: most Indians swing between scary equity and wealth-eroding FDs because bonds were never presented as the third option.
Supernormal returns anchor broken expectations
85% of today's equity investors entered post-COVID and watched Nifty triple. Against the 30-year reality of 11-12% (13-14% with dividends) and SPIVA's finding that 90% of fund managers fail to beat the market, even Jhunjhunwala treated 18% as kingly.
The SGS framework
A portfolio is only diversified when it ticks Security (liquid emergency funds), Growth (10-20% return assets) and Stability (regular cash-flow assets). Bonds are the stability piece most Indian portfolios lack.
'Below AA is junk' is imported psychology
BBB-minus is investment grade; banks already lend to those same companies; the fear came from Milken-era America and Indian rules barring institutions from sub-AA paper. 94% of issuances sit in AA/AAA partly because of that regulation, and retail is only 2% of bond investors.
CAMEL is how raters grade debt
Capital (debt-equity capacity to absorb shocks), Asset (what the money earns), Management (governance - 'we and our companies are different entities'), Earnings, Liquidity (honoring liabilities on due dates). Use it to read any bond.
Skin in the game beats ratings
Prachay subscribes entire bond issues and retains 15-20% till maturity before reselling to retail on Bondsmart. Girish's logic: don't trust the rating - trust that the structurer's own money rides to maturity, with monitoring and recovery initiative attached.
Defaults are not binary
Most bonds are secured; ILFS investors recovered ~60% and DHFL ~33%. Bondholders rank senior to equity - 'first the equity will get wiped out.' The real red flags: unsecured paper, weak rating, and a promoter without proven ability and willingness to pay.
The Conversation Breakdown
The equity-FD trap
⏱ Untimed topicFalling markets, post-COVID investor anchoring, supernormal versus normal returns, the SPIVA finding, FII selling and rupee math, and why FDs guarantee a real loss after tax and inflation.
Portfolio construction and bond basics
⏱ Untimed topicThe SGS framework (Security, Growth, Stability), equity and bonds as 'brothers' (owners versus lenders), how a debenture works, and the three bond categories with their return ranges.
Ratings, CAMEL and the junk myth
⏱ Untimed topicHow rating agencies grade debt with the CAMEL model, corporate governance as the under-understood variable, why 'below AA is junk' is psychology plus regulation, and why only 2% of bond investors are retail.
The Prachay/Bondsmart model
⏱ Untimed topicPrivate versus public placement, online bond platforms, subscribing entire issues and retaining 15-20% till maturity, secured versus unsecured bonds, and what ILFS and DHFL recoveries teach about defaults.
Bonds for founders
⏱ Untimed topicRed flags for investors, judging promoter willingness to pay, compliance prerequisites for issuers, and when bonds beat banks - collateral-driven lending, exhausted limits, loss-making startups - closing with bonds as 'empowerment instruments.'
Core Frameworks & Ideas
The SGS portfolio test
Security (3-6 months expenses, liquid, value-stable), Growth (assets targeting 10-20%), Stability (cash-flow generating assets). Missing any one of the three means the portfolio is not diversified - bonds fill the stability gap.
The CAMEL credit read
Capital adequacy, Asset quality, Management governance, Earnings, Liquidity - the common model rating agencies use; investors can apply the same five lenses before buying any bond.
Skin-in-the-game structuring
The arranger subscribes the whole issue, keeps 15-20% to maturity, monitors, and leads recovery if needed - aligning structurer and retail investor incentives instead of relying on ratings alone.
Seniority as the safety net
Secured bonds rank senior to equity in failure: equity wipes out first, then secured assets are liquidated for bondholders - which is why ILFS and DHFL bond investors recovered 60% and 33% respectively.
Actionable Next Steps
- ✓Investors: run your portfolio through the SGS test - if you hold only equity plus FDs, the stability leg is missing.
- ✓Before buying any bond, check three red flags the episode names: unsecured paper, rating below investment grade, and a promoter without proven ability and willingness to pay.
- ✓Read a bond's CAMEL - especially liquidity: can the company honor liabilities on due dates from its own working-capital cycle?
- ✓Founders: get compliance to listed-company standard (quarterly limited review within 45 days, financials closed fast) before considering bond funding - and test with unlisted debentures from your own ecosystem first.
- ✓Founders shut out by collateral-driven bank lending or exhausted limits: evaluate bond funding as the non-dilutive alternative the episode describes.
Notable Quotes
“if I get 18% return, I'll treat myself as a king”
“I call it the SGS framework”
“first the equity will get wiped out”
“bonds are empowerment instruments”
The One Thing to Remember
Bonds are the missing third leg of Indian portfolios: fixed 9-12% returns, senior to equity, secured by assets - and the 'below AA is junk' fear is psychology and regulation, not math.