How retail investors can warm up to the hot bond market

The upcoming inclusion of Indian bonds in global indices (JP Morgan’s Government Bond Index-Emerging Markets or GBI-EM from June  this year and Bloomberg Emerging Market (EM) Local Currency Government Index from January next year, with FTSE Russel too considering inclusion of Indian sovereign bonds in its index), has definitely thrown the spotlight on these instruments as never before.

We’ve already seen foreign investors pumping in a record Rs 8,000 crore into our bonds, swelling our forex reserves to $642 billion. The inflows have impacted corporate bonds too. Analysts estimate that that inclusion in the global indices will trigger an inflow $25 billion into India. But as the country’s bond market heats up, where does it leave the retail investor?

The reticence

Traditionally, Indian investors are very comfortable parking their money in fixed income products but their repertoire has rarely extended beyond bank FDs and debt mutual funds. The risk takers have delved into equities. But there are few takers for bonds, be it corporate debentures or government bonds.  Why? It can be put down to pure lack of knowledge and awareness. It is also the ease of transactions in equity and mutual funds that have made them the more favoured investment tools.

Understanding bonds

Bonds are debt instruments issued by corporates & government to meet their long-term fund requirements. Bonds issued by the central government are called dated securities or G-secs & have a tenure ranging from 2 years to 40 years. State governments raise funds through State Development Loans. Institutional investors like insurance companies, mutual funds, banks, pension funds or NPS Trust invest in G-Secs. 

Bonds issued by companies are called corporate bonds or debentures and used for funding expansion, project financing, and working capital requirements. However, investors in corporate bonds are exposed to credit risk i.e the risk of default by issuers of interest payments or principal amount on maturity. Investors can minimise this risk though, by investing in top rated bonds. Credit rating agencies like ICRA, CRISIL, CARE or Brickworks rate the bonds based on the issuer’s track record of principal & interest payments. Investors can have these bonds either in demat form or in physical form.

There will obviously be a difference in interest rate paid by government and corporates for the same maturity, which is called the yield spread or credit spread. Many corporates issue Non-convertible debentures (NCDs), which could be either secured or unsecured.

Retail access to government bonds

RBI has made retail investment in bond markets affordable by reducing the minimum amount to Rs 10000. Retail investors can participate in the bond market by opening RBI retail direct account by logging in to rbiretaildirect.org.in. They can also participate in primary issuances of treasury bills, trade in secondary markets and invest in sovereign gold bonds. These bonds are less volatile and help moderate and conservative investors in diversifying their portfolio while ensuring regular income. 

Given that we are close to or at the peak interest rate cycle and the fact that, RBI kept policy rates unchanged in the recent MPC (Monetary policy committee) meeting, investing in bonds is an attractive option. Investors can lock in to these rates before the central bank starts cutting interest rates later in the year. A more robust bond market will also help the RBI in the transmission of monetary policy more effectively through open market operations.