The fixed-income market is delighted to observe that corporate bonds have found more than a cursory mention in the recent Union Budget. The finance minister has proposed to address a major structural issue by introducing a market-making framework. The move, aimed at improving liquidity, is expected to bring about efficient pricing for corporate bonds.
The news flow does not stop with the Budget. Close on the heels of the finance minister, there is a cautionary word or two from the Sebi chief, who has expressed disappointment with the low awareness of corporate bonds. The latter are not perceived as attractive as they should be — investors these days are more aware of cryptocurrencies than of corporate bonds, it is lamented.
The discussion on corporate bonds will be particularly healthy in the context of investment trends, especially for those who look beyond equities to other asset classes for a variety of reasons. This article will show investors the way forward. How can they approach corporate bonds? What can they accept, what must they avoid?
Before we begin, here is what bond market fans can infer from the FM’s message.
The three points mentioned above will result in an overall boost for our debt space Remember, many investors do not harbour a benign view on the bond market. Some quarters think it is too slow, others underscore their negative views on liquidity. Equity, in comparison, is hot and happening. Investors are forever excited about stocks. Among common investors looking at large- and mid-cap counters, there are no big issues concerning trading volumes or extent of participation.
The average participant must remember that corporate bonds come in all shapes and sizes. Not all of these are worth your time — some, typically the ones that carry low credit ratings, are best avoided. Timely payment of interest and repayment of principal are non-negotiable conditions.
Here are some of the parameters worth checking:
- As an individual investor, you should be aware of an issuer’s financial health. There have been many cases — consider the lower-rated space, for instance — when corporate issuers have defaulted on payments. An ordinary investor who does not get his interests in a timely manner will be, quite naturally, very unhappy.
- A direct approach to bonds, therefore, is not the perfect solution for many. The average investor will do well if he uses bond funds instead. Simple allocations to well-managed funds will help him stay relatively safe and secure. There are a number of such funds in the market — a few well-chosen options can add value to an ordinary investor’s portfolio, provided his risk profile permits it.
- And, last, this brings us to the lament (expressed by the Sebi chief) that there is not enough awareness on this front. This realisation stems from a survey that has reportedly established that only about 10 per cent of our investors can check the box. The survey also noted that by comparison, awareness of cryptocurrencies stands at roughly 15 per cent. Clearly a sign of the times, it seems.
Yes, this trend is somewhat disappointing. Investors, we firmly believe, must cotton on to the powerful idea of bonds. Let us view these as helpful tools — to be used for easy diversification and efficient allocation.
As contemporary, forward-looking Indians, we now need to consider the corporate bond market as a serious contributor to business and industry. In other words, this is a clarion call — it is time to step away from mere bank credit.
Nilanjan Dey is partner, Wishlist Capital