As one of the fastest-growing economies in the world, India has gained considerable attention as an investment destination. Institutional investors, domestic and international, have poured in capital to fuel the country’s development and the country’s aspirations.
One of the popular investment instruments considered by these investors is bonds.
What is the bond market?
The bond market, alternatively known as the debt market or the fixed income market, is where institutions such as governments and corporations raise debt capital to fuel a country’s or company’s growth initiatives or manage day-to-day working capital needs. This capital is borrowed for a predetermined tenure, during which the investor typically receives interest and principal repayments in defined intervals. The bond market in India is approximately Rs. 205+ lakh crores and has grown over 77% in the last five years and is expected to more than double in the next five years (Source: SEBI).
What are the types of bonds?
Bonds can be classified several ways based on who is issuing them; credit risk ratings; the duration they are issued for; the type of interest they offer or zero-coupon bonds; unsecured vs. secured bonds; listed vs. unlisted bonds; the kind of sector projects they will be invested in, etc.
Short-term government securities issued for 91, 182, or 364 days are called Treasury bills while medium and long-term ones (between 5 to 40 years) are called G-Secs. Treasury bills or zero-interest (or zero coupon) bonds are issued at a discount and the difference between purchase and maturity value is what the investor gets as returns in the investment.
Sovereign gold bonds, becoming an increasingly popular avenue of investment now, are bonds that are linked to the appreciation of the price of the yellow metal in addition to defined interest payments (annual coupon rate is ~2.5%). This allows one to benefit from having invested in gold without necessarily owning it in physical form.
Similarly, corporate bonds can be offered either through private placement or through public issues.
Why the bond market and why now?
Historically, due to educational awareness, ease of access, and higher minimum investment ticket size, the bond markets, especially the corporate bond market, have been pretty much out of bounds for a lot of retail investors. However, with increased digitization, educational awareness, and support from regulators (SEBI and RBI), it is now increasingly becoming easy for individual investors to explore the bond market for investments.
Fixed-income instruments like bonds add great diversification to one’s investment portfolio and yield good risk-adjusted portfolio returns. They are comparatively less risky than equities, not volatile like stocks, and provide a steady predictable source of income. Since the duration for bonds is varied, one can leverage these instruments for goal-based planning for the short, medium, and long terms.
The advent of Online Bond Provider Platforms (OBPPs), guided by SEBI for buying and selling of listed bonds, has made it easier for retail investors to invest in bonds with a few clicks.
With the interest rates being high, it is a good time to lock in bonds with great yields before any interest rate cuts happen which would reduce bond yields and increase bond prices. For a moderate risk appetite investor, it is recommended to have 40-60% in debt investments like bonds as part of the overall investment portfolio. Investments in Bonds do carry risks including borrower credit risk, liquidity risk and interest rate risk, and hence investors need to evaluate and make informed decisions that align with their risk appetite.
India’s government bonds have been included on several global indices (Ex: JP Morgan Index), which is already bringing significant foreign inflows into the bond market. According to Clearing Corporation of India (CCIL), Foreign Portfolio investors have purchased $8.7 billion (INR 71,817 crore) worth of Indian government bonds in the last 18 months with $8.3 billion worth of investments in government and corporate bonds just in Year 2023.
Simply put, now is the time to add bonds to your financial portfolio and reap the benefits of a growing India while contributing to its development.
