Indian investors should think about bond investments, say experts; here's why

SEBI's move has made bonds easily accessible to retail investors, and at this time, when interest rate reversal is expected in the markets, experts say Indian retail investors should look towards bond investments along with their equity build-up.

Also Read: Will investing in bonds be made easier in India?

How will SEBI's move impact the bond market in India?

Lower face value of corporate bonds will make bond investments attractive and increase the accessibility of bonds to a wider range of retail investors. It could increase non-institutional investors' involvement in the corporate bond market.

Also Read: Zerodha’s Nithin Kamath hails Sebi’s move that boosts retail participation in bond market

According to Pravesh Gour, a senior analyst at Swastika Investmart, with more ordinary investors purchasing bonds, the reduced investment level of ₹10,000 will initiate a positive feedback loop. As a result, more bonds will be issued, and the secondary markets will see intense trading activity in the coming years.

"This wise decision may encourage regular investors to purchase bonds. With all the changes over the past few years, SEBI has done a fantastic job of enabling small investors to purchase bonds," said Gour.

Also Read: The evolution of bond investment in India: Sachetization and its implications

Shweta Rajani, the head of mutual funds at Anand Rathi Wealth, also believes the reduction of face value would bring down the person's debenture price, allowing retail investors to explore this place, too.

"Once the retail investors explore this space, the bond market's liquidity could improve as more transactions occur, leading to more price efficiency and we could see spread contraction between G-Sec and corporate bonds," said Rajani.

Vikrant Mehta, the head of fixed-income at ITI Mutual Fund, expects SEBI’s decision to reduce corporate bonds' face value to fasten the " democratisation " process of corporate bond investments.

"Such an action could not only increase the appeal of such products and bring them with the reach of retail investors but also benefit the bond issuer by potentially expanding its investor base – which has a different outlook and mindset," said Mehta.

Is it time for Indian investors to think about bond investment?

Asset allocation is the key to long-term wealth creation so fixed-income investments should be a part of one's portfolio.

This appears to be an ideal time for investments in the bond market as they offer higher returns than fixed deposits while they are less riskier than equities.

Bonds are an important part of a balanced portfolio. Experts underscore that in long-term portfolios, one should ideally have around 20 per cent exposure to bonds. However, investors need to compare it with other instruments available in the debt space on key parameters like return potential, taxability, liquidity, credit risk, and impact of interest rate.

As per Arvinder Singh Nanda, senior vice-president of Master Capital Service, with easier access to bonds, retail investors can seamlessly integrate them into their portfolio, leveraging benefits, such as consistent income and reduced volatility, compared to stocks.

Increased retail investors will contribute to a more liquid and robust bond market, Nanda said.

Mehta said in the current context, interest rates are at near-peak levels and are expected to decline over the coming year. Thus, bond investments at the current juncture have the potential to realize not only interest income but could also deliver capital gains over the next 12-18 months.

Also Read: Equity vs debt: What's your pick?

What should you keep in mind before investing in corporate bonds?

Rajani of Anand Rathi Wealth underscored that corporate bonds can be risky as they carry a single-issue risk. Therefore, one should consider investing in corporate bonds only when a yield advantage is sufficient to compensate the investor for single-issue risk and tax inefficiency.

"If you are in more than 10 per cent tax bracket, then tax inefficiency creeps in when we compare NCD to alternatives like an arbitrage fund or a multi-asset fund. You can consider investing in bonds if they offer double-digit returns and you fall in a 10 per cent tax bracket," said Rajani.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 04 May 2024, 11:36 AM IST