In recent years, global markets have been beset by a spate of disruptive events, creating unprecedented challenges for investors. The Russia-Ukraine conflict, equity market instability, banking sector turbulence and setbacks in the realm of cryptocurrencies have left investors grappling for ways to safeguard their assets and earn stable returns.
As the global economy convalesces from the pandemic, concerns about mounting inflation levels have induced market volatility and fears of central banks increasing interest rates to counter inflation, potentially restraining economic growth. These factors have led to erratic swings in equity markets, with major indices experiencing significant sell-offs and crashes. For instance, the S&P 500 Index plummeted by almost 30% in early 2022, wiping out trillions of dollars in investor wealth.
The banking sector has also come under immense pressure, with several high-profile institutions grappling with financial crises and regulatory challenges. For example, SVB and Credit Suisse have encountered significant issues. Similarly, cryptocurrencies have witnessed significant declines due to a series of scams and failures, with institutions like Vauld and FTX succumbing. In 2021-22, Bitcoin plunged significantly from its all-time high of nearly $65,000 in December’21, falling below $20,000 by end of December’22.
As a result of these tribulations, investors are increasingly looking to the bond market as a means of safeguarding their assets and earning stable returns. With the current market uncertainties and volatility, investing in bonds in India is a judicious way for investors to diversify their portfolios, have less portfolio volatility and earn stable returns.
According to market analysts, the bond market in India is showing promising investment potential, as globally there is talk of US reaching peak rates soon. Additionally, the Indian government’s emphasis on fiscal discipline and structural reforms has resulted in a favourable environment for the bond market.
Why invest in the bond market?
- Regular income and Predictable Cashflows
Bonds are a popular investment choice for those seeking a predictable income stream. They pay interest at regular intervals, which can be monthly, quarterly, or annually, providing a reliable and consistent source of income. This makes bonds particularly appealing for individuals looking to manage their ongoing expenses, such as retirees or those living off their investments.
- Portfolio Diversification
Investing in bonds can be an effective way to diversify your portfolio and manage risk. Unlike stocks, which are more volatile and subject to market fluctuations, bonds offer a more stable investment option with predictable returns. Because of their lower risk profile, bonds are often used as a way to balance out riskier investments in a portfolio.
- Bonds v/s other assets:
In comparison to other illiquid investment alternatives such as FDs, Real Estate etc Bonds offer several benefits to its investors such as no lock-in period or penalty on withdrawal. Bonds are a liquid instrument as they are easily tradeable in the secondary markets.
Things to keep in mind while Investing in Bonds:
- When investing in a bond, there are several important points to keep in mind.
- Consider the issuer: bonds can be issued by central and state governments, PSUs, banks, companies and municipal corporations
- Consider the yield: higher yields may offer greater potential returns, but also come with higher risks.
- Consider the bond credit rating: the higher the credit rating, the lower the risk.
- Consider if the bond is secured or unsecured: secured bonds are generally considered safer, even though unsecured bonds may provide a higher return on investment.
- Pay attention to the maturity date of the bond: longer maturity dates are riskier as the bond’s price will move more with market changes.
Risks to keep in mind while investing in Bonds:
As goes with any investment option, investing in Bonds also involves certain risks, that investors should keep in mind. Some of these risks include Interest Rate Risk (bond prices fall when rates rise), Reinvestment Risk (reinvesting at lower rates), Inflation Risk (reduced purchasing power of future payments), Credit/Default Risk (issuer unable to make payments) and Liquidity Risk (difficulty finding a buyer). It is best to read the offer documents and rating reports of a bond before investment to familiarize oneself about the issuer.
Bond Market Industry in India:
The Indian debt market is currently heavily skewed towards government securities (G-secs) and State Development Loans (SDLs), with corporate bonds comprise 23% of the market. In March 2022, the outstanding stock of governments stood at Rs. 133.786 lakh crore while outstanding corporate bonds were worth Rs. 40.17 lakh crore, according to ICCL and SEBI.
India’s ambitious target of achieving a $5 trillion GDP in the near future is set to be underpinned predominantly by the inflow of credit to corporations via the bond markets. Recognizing the untapped potential of the corporate bond market, the Indian government and regulators such as SEBI and RBI are taking measures to promote participation and liquidity for the market’s growth and development.
The bond market in India has experienced significant advancements in recent years. The efforts of both the government and regulatory bodies to simplify and streamline the industry have created an environment conducive to growth and expansion. Implementation of an Online Bond Platform Provider (OBPP) has instilled greater confidence in non-institutional investors who can now invest directly online and have a plethora of bond choices.
As the industry continues to evolve, it is imperative for investors to exercise caution and transact only through SEBI-registered platforms (OBPP), as these are strictly regulated and ensure compliance with regulatory standards. With the right approach and a sound investment strategy, bond investments in India can offer attractive returns while providing a safe and secure avenue for investors to grow and preserve their wealth.
Views expressed above are the author’s own.
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