Looking for safety, liquidity, healthy returns? The name could be bond
Access to India’s corporate bond market is rapidly changing, with the emergence of online bond platform providers (OBPP). These companies — incorporated in India and registered as stock brokers in the debt segment of stock exchanges — sell bonds on their platforms, allowing retail investors to buy bonds online in a matter of minutes.
Benefits and risks
There are several advantages of investing in bonds, Jugal Mantri, Executive Director and CEO, Anand Rathi Global Finance, told The Federal. “For one, they offer better returns than bank fixed deposits (FDs), in the range of 7 per cent to 9.5 per cent. Secondly, bonds are more liquid, and investors can sell them in the secondary market. The third benefit is that there are certain tax-saving bonds, wherein buyers can enjoy tax exemption on their investments,” he added.
“There is also lower risk associated with investment in bonds. Buying Government Securities (G-Secs) — a tradeable instrument issued by the Central government or state governments — is bound to be less risky compared to other instruments, such as unorganised deposit schemes and P2P lending. Even investing in secured high-rated corporate bonds is safer, as they have collateral backing,” he added.
Bonds are popular among investors because they offer a steady supply of income. They allow investors to preserve capital, as bondholders receive the entire principal amount if the bonds are held to maturity. Being less volatile than stocks, these financial instruments frequently outperform other asset classes during recessions.
However, like all investment options, bonds bring with them a set of risks — credit risks, interest rate swings, lesser yields, and changes in the issuer’s financial health.
Credit risk is the risk of the issuer of the bond defaulting and not being able to pay the investor’s principal or interest amounts. The funds are then recovered from the secured collateral. Also, there is an inverse relationship between the bond price and market interest rates. So, if the interest rate increases, it will result in volatility in the investor’s returns.
Things to consider
Mantri shared the parameters that investors should consider before investing in bonds. “For one, there is credit rating — AAA-rated bonds are considered safe in India. They are available at decent yields and offer better liquidity in the secondary market,” he said.
“Second, the tenure of the bond should be equal to the investment horizon of the investor, as higher-duration bonds command higher yields. However, these bonds also come with higher interest rate risks; so, the tenure of the bond should not be much higher than the investor’s time horizon,” he added.
Mantri cautioned that investors should also consider the impact of tax slabs/capital gains depending on the yield/coupon of the bond. “Also, they should do a background check on the company issuing corporate bonds before they invest,” he said.
About RBI Retail Direct
Mantri sounded bullish about the bond market in India. He said, “In the coming years, we expect higher participation from retail investors in the bond market, with the government introducing RBI-Direct for retail investors, and with many private companies issuing public bonds to raise capital, offering decent returns.”
When investors use RBI Retail Direct, they do not have to depend on an intermediary for buying G-Secs. Instead, they deal directly with the Reserve Bank of India, and therefore, this method does not involve any transaction fees.
“Investors are looking for diversification in their portfolio, and have been eyeing direct bond market exposure. This trend is expected to grow in the coming decade. With India’s inclusion in the global sovereign bond index expected in the near future, we can also expect an increase in the number of foreign participants in the country’s bond market. Further, as corporates look to decrease their cost of funds, they will be eyeing the developing bond market in India to raise more funds, creating a network effect,” he added.
Hope for higher interest rates in the future is increasing with the improving economic outlook and inflation remaining high. Mantri said, “This is a good time to invest in bonds with an investment horizon of two to three years. We are nearing the peak of the rate-hike cycle, after which we could see an easing in the yields along the curve. Thus, bonds are expected to generate attractive returns for investors as compared to the last couple of years.”
(This article is meant to provide information, and does not constitute investment advice.)