2024 has been a great year for the Indian bond markets. Several major milestones have been achieved—such as the inclusion of Indian bonds in JP Morgan and Bloomberg global bond indexes and S&P upgrading India’s credit rating outlook to ‘positive’ from ‘stable’. Apart from these global factors, the Securities and Exchange Board of India’s (Sebi’s) decision to reduce the face value of listed bonds is also likely to boost the Indian bond market.
Attracted by the robust Indian economy and an expanding bond market, foreign investors are also focussing on Indian bonds. Data available with NSDL show foreign portfolio investors (FPIs) are investing heavily in Indian bonds, while the Indian equities saw an outflow of Rs 13,400 crore from FPIs in 2024 so far. On the other hand, as of November 08, 2024 FPIs have invested Rs 1.44 lakh crore in Indian bonds in this duration.
FPIs, HNIs, and other big investors have always had bonds in their portfolios. How can retail investors approach bond investments and what should they look for when choosing bonds? In an interaction with Business Today, Vineet Agrawal, Co-founder of Jiraaf, a Sebi-registered online bond platform, shared his insights on the Indian bond market and role of credit rating agencies. Edited excerpts:
Q) What inspired you to start an online bond platform?
Vineet Agrawal: What inspired us the most is the investment pattern in India. Our experience of working with large family offices and ultra-high net worth individuals (UHNIs) revealed distinct capital allocation strategies. Unlike average individual investors, these entities allocated up to 40-50% of their portfolios to diverse alternative asset classes.
India’s fixed income market is underpenetrated, unlike global markets where bond markets dominate. Globally, bond markets surpass equity markets in size, but India is an exception. To achieve India’s economic growth aspirations ($5-20 trillion), the bond market must expand. With India’s economic growth ambitions, we see significant potential for bond market expansion, supported by government initiatives.
We believe bonds will become a key part of individual portfolios, like mutual funds. Optimal market conditions, coupled with technological readiness, prompted our decision to penetrate the market and capitalise on the timely convergence of factors.
Q) How has the Indian bond market evolved over the past few years and what factors have contributed to its growth?
Vineet Agrawal: Fixed income, by its very nature, does not have high penetration rates in India. In contrast, the bond market globally is much larger in many countries. But a country cannot ignore the bond market when it is set for economic growth. There are a lot of tailwinds where the government has already started thinking of the bond market at an institutional and retailer level. So, this market is set to boom now and will become a part of every individual portfolio in the next decade.
Q) How can retail investors approach bond investments and what should they look for when choosing bonds or bond funds?
Vineet Agrawal: Top three things that retail investors should consider when choosing bonds should be:
1. Risk-Return Matrix: Align your investment with your risk appetite. Conservative investors should opt for lower-yielding bonds from established corporates, while moderate-risk investors can consider well-rated companies offering balanced risk and return.
2. Security Structure: Carefully evaluate how the bond is secured and the issuer’s repayment obligations. Bonds with stronger security packages will naturally be more attractive to conservative or moderate-risk investors, while higher-risk bonds may require closer scrutiny to ensure they align with your risk tolerance.
3. Bond Tenure: For retail investors, I generally recommend prioritising shorter to medium-term bonds (avoiding long-term ones) to manage risks and adapt to market changes. Shorter to medium-term bonds are more appropriate for retail investors, as they offer more manageable risks and the ability to react to market changes.
Q) How does your platform address the challenges typically associated with bond investments such as liquidity, transparency, and accessibility?
Vineet Agrawal: In essence, our bond platform is built on a foundation of deep market understanding, meticulous curation, and full alignment with investors. We believe bonds are poised to become a crucial asset class for all investors in India, and we’re here to lead that transformation.
Our platform stands out through careful curation of bonds, supported by rigorous underwriting, and balanced risk and rewards. We curate diverse bonds across sectors, risk spectrum, yields and tenure to cater to different customer segments providing an opportunity to build a diversified investment portfolio. Our rigorous underwriting process ensures that every bond undergoes a detailed risk-reward analysis before being recommended. Additionally, we invest our own capital in these bonds before offering them, ensuring our interests align with yours. Yields on the bonds listed on the platform typically range from 8% to 15% IRR.
Q) What role do credit ratings play in bond selection, and how important are they in the Indian context?
Vineet Agrawal: Credit ratings play a decent role in the decision-making process, especially when dealing with highly rated bonds. However, there are a few important considerations to keep in mind. Typically, credit rating agencies provide a long-term assessment of a company, but they may not delve deeply into the specific bond issue itself. For instance, a company might have an AA rating, but the bond issue in question could lack a robust security structure. Many credit rating agencies do not thoroughly evaluate the security package of individual issues.
This is where Jiraaf comes in. While a credit rating is a useful indicator, it should not be the sole basis for making an investment decision. It’s good to consider it, but it shouldn’t dictate 100% of your choice. Investors need to assess the structure of the specific transaction—including the tenor, security, covenants (these are basically metrics that a bond issuer cannot breach throughout the duration of the bond tenure), repayment frequency, and other governance factors.
Often, the same company may have two different bond issues with the same credit rating, but the underlying governance and structure can vary significantly. That’s where our expertise adds value. We help investors identify which issue is better by analysing these critical factors. In short, we guide investors beyond just the company’s credit rating and provide insights into the nuances of each bond issue, ensuring they make a well-informed decision.
Q) How do you see the future of bond investing in India, especially with the rise of online platforms and access to digital financial products?
Vineet Agrawal: The future of bond investing in India looks very promising. Retail participation has grown five times in the last three years and is expected to keep rising. Recent regulatory changes are making the bond market more accessible and appealing for individual investors.
Liquidity has been a challenge, but new regulations from Sebi are set to improve it, making bonds a more attractive option. With more companies issuing bonds, investors have a wider range of choices across sectors, making portfolios more diverse and resilient.
The bond market is also being transformed by digital platforms, similar to the equity market’s growth. With smartphones reaching Tier II cities, more investors are exploring bonds, driven by affluence rather than location. This trend is expected to continue as digital access and information flow increase.