Indian investors love fixed income. Paradoxically, for years, small investors have merely watched the corporate bond market from the sidelines. Some have nibbled at it via debt mutual funds, but targeted investments in individual bonds have been out of reach for many. That is set to change, with Sebi slashing the minimum ticket size of privately placed corporate bonds from Rs.1 lakh to Rs.10,000. This move opens up a new investment opportunity for retail investors who were previously priced out of the market.
Retail investors mostly chew on publicly issued debt, which is offered at as low as Rs.1,000 per unit. But this makes just a tiny slice of the bond pie. Privately placed, listed company bonds, make up a meatier 98% of the bond market. To put this in context, 2023-24 saw 45 public debt issuances amounting to Rs.19,168 crore, compared with 1,347 private debt issuances worth Rs.8.37 lakh crore. The latter were, until now, sold at a face value of Rs.1 lakh each, and as high as Rs.10 lakh not too long ago. This proved to be a high entry barrier for the small investor. The significant initial investment restricted small investors to just one or two issuers, leading to concentration risk in their portfolios. Buying multiple bonds of 3-5 different issuers for diversification was out of bounds. However, with the slashing of the ticket size, small investors can now make company bonds an integral part of their portfolios. Government bonds are already sold at a face value of Rs.10,000 and also directly offered to retail investors.
Investors can pick bonds from different risk-return profiles
Note:Figures are prevailing yield on corresponding Nifty Corporate Bond Indices.
Data as on 30 April. | Source: NSE
Online bond platforms like Wint Wealth, GoldenPi, IndiaBonds, and Grip, among others, have already made big strides in democratising access to the bond market. The reduced corporate bond sizes provide investors with a broader range of options, coinciding with changes in debt mutual fund taxation. Since 1 April last year, debt mutual funds no longer benefit from earlier indexation benefits, with gains now taxed at the investor’s slab rate. However, gains from listed bonds sold after one year are still taxed at 10%, making selling individual bonds before maturity more taxefficient. Interest income from individual bonds is taxed at the slab rate, while income from underlying bonds of debt funds is deferred until redemption, enhancing tax efficiency.
Lower taxation isn’t the sole draw for individual bonds. Experts suggest that they offer the potential for higher returns, with AA-rated bonds yielding 9-10% and A-rated bonds yielding 11-12%. It’s a compelling opportunity for bond investors. Varun Fatehpuria, Founder, Daulat Wealth Management, insists, “Investors keen on high accrual can now look at NCDs with the reduced ticket size since they can earn an additional 200-300 bps over fixed deposits/debt funds.” Fatehpuria adds that after 2020, true ‘credit-risk’ funds— investing in lower credit quality, higher yield bonds—no longer exist. This has left investors fetching close to G-Sec yields, around 7.25-7.5% in debt funds, which is not very exciting. Vidya Bala, Head, Research, Primeinvestor.in, asserts, “Bonds make sense for investors looking to build a diversified income stream, and having a large corpus to spread aross safer government avenues, and some additional returns through individual bonds.”
ADITI MITTAL
CO-FOUNDER OF INDIABONDS.COM
Note:“Structured debt products often carry higher risks and lower transparency. Small investors should carefully assess the credit ratings and financial health of the bond issuers to mitigate default risk.”
However, with unexplored new horizons come potential hazards. While investing in fixed income, investors typically hunt for safety of capital and predictability of return. Most retail investors shy away from debt funds as these are market-linked. While individual bonds may seem appealing, the onus of due diligence falls on the investor. These are not risk-free, so avoid chasing higher yields blindly. Carefully review all risk disclosures before choosing an issuer. “Investors should exercise caution with complex structured debt products, which often carry higher risks and lower transparency. Smaller investors should carefully assess the credit ratings and financial health of the bond issuers to mitigate default risk,” exhorts Aditi Mittal, Co-Founder of IndiaBonds.com.
Experts insist that debt funds remain the ideal avenue for most investors for a variety of reasons. “Debt funds take away the hassle of identifying opportunities, both in terms of interest and credit. These also allow the cushion of anytime money. Bonds may not always enjoy high liquidity and allow you to sell when you need the money at the right price,” remarks Bala. She also points to the reinvestment risk in individual bonds maturing beyond 2-3 years. “Most corporate bonds (direct bonds) are best held by retail investors for 2-3 year periods, unless their rating is of consistently high quality (AAA or AA+). In other cases, taking long-term bonds can be risky and is best done through the mutual fund route.” Fatehpuria suggests that debt funds are the preferable choice for those looking to benefit from duration, aiming to capitalise on interest rate decreases by investing in longer-term bonds. “If someone is savvy enough and wants to play duration, then we feel debt MFs are a better vehicle due to the inbuilt diversification,” he says.