In conversation with Vishal Goenka, Co-Founder of IndiaBonds.com
Historically, the bond market has been predominantly controlled by non-institutional entities, we envision a future where the democratisation of bonds in India becomes a reality, states Vishal Goenka, Co-Founder of IndiaBonds.com.
Why are fixed-income alternatives being explored by retail investors?
Several factors contributed to this change that aims to transform the landscape of fixed-income investment in India. The primary reasons are as below:
- Emergence of Online Bond Platform Providers (OBPP): Fixed income remained in the dark shadows of knowledge and institutional-driven market. Now with OBPPs, it has become easier to learn and get the right information on bonds, technology has helped to access these investments easily and compulsory SEBI registration has built trust amongst investors. For example, on our platform, one can buy fixed-income products by signing in, KYC and payment – all in just 5-7 minutes.
- Indexation removal from Debt Mutual Funds: In March 2023, SEBI removed the indexation benefit for Debt Mutual Funds. Investors mostly understood the benefits of portfolio diversification and had fixed income in it via Debt Mutual Funds due to favourable taxation. With this tax arbitrage gone, retail is looking at direct bond investments to earn higher returns and have more choice.
- More options than traditional Fixed Deposits: Although in recent times the FD headline rates have gone up due to credit offtake in the banking sector, the attractive rates are usually offered for a short period of up to one year. If we were to believe that interest rates are peaking, bonds not only offer higher interest rates but also enable you to lock in these rates for a longer duration of 2-10 years depending upon your investment horizon. The reinvestment risk at lower interest rates in FDs are taken away by investing in bonds.
How are investors navigating the financial jargon related to bond investment?
The most significant challenge that fixed-income investors encounter pertains to the lack of knowledge or awareness, which extends to both investors themselves and those who facilitate bond transactions, such as brokers or financial advisors. Consequently, online platforms have become increasingly proactive in delivering informative content via blogs and videos. There is also the emergence of educational webinars, corporate presentations and Investor Awareness Programs aimed at enlightening individuals about bonds.
The goal is to provide investors with a deeper comprehension of this asset class, enabling them to make well-informed decisions when engaging in fixed-income investing. This is an ongoing journey and I believe awareness of bonds is where equities were 10 years ago in India. But thanks to technology, we will not take 10 years to get to where equity awareness is today!
What is the minimum ticket size they are exploring while investing in bonds?
The minimum investment amount for government bonds, or G-Sec, starts at a face value of Rs 100. This means that technically, you can invest as little as Rs 100. In the case of private placements, bonds typically have a face value of Rs 1000, and the minimum investment through primary applications is Rs 10,000. So, there is a wide range of investment options available in terms of pricing. Most private placements still have a face value of Rs 1 lakh. So, when it comes to bond investments, you can start with as low as Rs 100 for G-Sec, go up to Rs. 10,000 for public bond issues, and even consider corporate bonds with private placements that require a minimum of Rs 1 lakh.
Based on our experience with retail investors, the average investment size is typically in the range of Rs 4-7 lakh with ranges being Rs 10,000 to Rs 10 lakh per investment.
Why should retail investors consider bonds over fixed deposits, recurring deposits, and mutual funds?
As mentioned earlier, bonds give you a wide choice across maturity, issuer and duration of investments. Fixed Deposits offer returns for the short term only and that gives rise to reinvestment risk. Also, there is usually a penalty for early withdrawal wherein you can simply sell a bond if required. Bonds are linked to the capital market, which presents an opportunity for potential capital gains if interest rates were to go down or the credit quality of bond issuer is to improve.
In the case of mutual funds, their Net Asset Value (NAV) is market-based and exits can be impacted by the same. Also, typically Debt Funds offer lower yield when compared to direct bond investments. Mutual Funds do offer the benefit of portfolio diversification, but this can also be recreated by diversifying an individual’s bond portfolio. Direct bond investment can be curated to investor’s choices and risk profile. With indexation benefits going away from Debt Mutual Funds, direct investments in bonds offer a simplistic DIY process for investors of today.
What are the key risks associated with investing in bonds?
Like any other investment product, there are certain risks associated with bond investments as well. The primary ones are as follows:
- Interest Rate Risk: This is a significant factor to consider in bond investments. When interest rates fluctuate, it affects the pricing of bonds in the secondary market. Typically rising interest rates in the economy cause a fall in bond prices and vice versa.
- Credit Risk: The creditworthiness of bond issuers can change with market cycles or poor performance, potentially leading to downgrades and default risks. To manage this risk, diversification is key. Investors should spread their fixed-income investments across bonds with varying credit ratings and allocate a substantial portion to government securities. Also, investors should read the credit rating and information memorandum documents before investing.
- Liquidity Risk: This is a concern for corporate bonds, especially when investing in high-yield bonds. These bonds may have lower liquidity, making it challenging to liquidate them quickly if needed. This is also captured in a wider bid-ask spread for trading. To address this issue, investors can consider building a diversified portfolio of bonds to include government securities (g-sec) or AAA-rated securities, which are highly liquid and can be readily converted to cash.
How can retail investors choose the right bonds for their investment goals?
To choose the right bonds for their investment goals, retail investors should first define their financial goals and assess their risk tolerance. Consider the desired bond term, ranging from short to long term, and evaluate the credit quality of potential investments. Diversify across government, corporate, municipal, and high-yield bonds to spread risk. Pay attention to yields and coupon rates, factoring in tax considerations if applicable. Stay informed about market conditions, as interest rate trends impact bond prices. Ensure accessibility and liquidity when selecting bonds, and seek professional advice if needed. Regularly review and adjust your bond portfolio to align with your goals and risk tolerance, and maintain a long-term perspective in your investment approach.
What are the future trends in the bond market?
We envision a future where the democratization of bonds in India becomes a reality. Historically, this market has been predominantly controlled by non-institutional entities. However, we are now witnessing a significant shift towards greater participation from the retail sector, which is set to play an increasingly prominent role in bond investments. This trend points to a promising trajectory for the bond market in the years to come.
In fact, it's noteworthy that in the second quarter of 2023 alone, the Indian bond market expanded by a substantial USD 93 billion. Particularly impressive is the corporate bond segment, which saw its outstanding size grow by an additional USD 23 billion, now standing at an impressive $533 billion. This represents an impressive 4.35 per cent absolute growth and an annualized growth rate of 17.4 per cent. (Source: CCIL, SEBI)
Technology will play a pivotal role in this transformation as it facilitates the dissemination of bond investment information through innovative tech solutions, expanding access to a broader audience, including retail investors, high-net-worth individuals, and small corporate entities, thus promoting financial inclusion.