FY25 is turning out to be the year of the bond; here’s why?

 

The Securities and Exchange Board of India (Sebi) has decided to lower the face value of listed bonds to Rs 10,000 from Rs 1 lakh. Earlier in 2022, the regulator had reduced the face value of such securities to Rs 1 lakh from Rs 10 lakh. Sebi's decision to reduce the face value of listed bonds is likely to boost the corporate bond market by attracting more inflows from retail investors.

In an interaction with Business Today, Nikhil Aggarwal, Founder and CEO of Grip Invest, shared his insights on the likely impact of this face value reduction, why retail investors should invest in bonds, what to expect from bond markets, and more. Edited excerpts:

BT: Sebi officially announced cuts on the face value of debt securities; what does it mean, and what is the likely impact of this decision? 

Nikhil Aggarwal: This is a defining moment for the bond market, akin to the launch of the zero-brokerage model in equity, which transformed retail participation. 98% of all bond issuances amounting to 8.4 lakh crore in FY24 were privately placed, and only 2% were public offers. By reducing the face value to Rs 10,000, SEBI has now made the entire bond market available to retail investors. This will provide investors with more options in terms of issuers, ratings, tenure, and return on bonds. A lower face value will also help increase trading volume and, hence, enhance liquidity in the market.

Combined with enabling regulations, robust tech infrastructure, and high-quality issuers, we have all the necessary ingredients to see multi-fold growth in the market. Coming on the heels of India's inclusion in global bond indices, FY25 is turning out to be the year of the bond.

BT: Why should investors choose fixed income? What should be kept in mind while investing in bonds?

Nikhil Aggarwal: As the name suggests, fixed-income provides predictable returns. Unlike stocks, these returns do not see the volatility of the stock market and provide predetermined returns on a predetermined schedule. In fact, they are incredibly complimentary for investors who have stock portfolios, as stock and fixed-income are not correlated.

Bonds, along with FDs, are popular fixed-income investment options. While investing in bonds, investors must ensure they evaluate the quality of credit associated with a bond. Similar to stocks being classified as large-cap, mid-cap, and small-cap, bonds are classified by their credit rating, which represents the size of the issuer, the strength of its business, and its ability to repay. AAA-rated stocks are considered the safest, followed by AA, A, and BBB.

BT: What are the different fixed-income options available for retail investors in India?

Nikhil Aggarwal: Bank FDs are the most well-understood and popular fixed-income investment option, with nearly $2 trillion invested by Indian households. Other popular and SEBI-regulated options include bonds issued by the Government of India or corporations, which by themselves are a $200 billion market. With recent regulatory reforms from SEBI, which have led to fractionalization of fixed-income investments, new options like SDI and commercial real estate are also viable.

BT: With the recent announcement about the inclusion of Indian bonds in JP Morgan and Bloomberg Global Emerging Market Indices, how will it impact the yields and returns, and what is the benefit to existing Indian investors?

Nikhil Aggarwal: The inclusion in the index has opened up a new and very large pool of capital for Indian government bonds. This inflow of capital is not restricted to just government bonds but has also started to spill over into corporate bonds.

More demand for bonds is likely to result in higher bond prices over time. Investors holding bonds today or investing in them now will likely see return upsides from the same. An increase in market participants will also boost liquidity, which will once again result in a better investing environment for Indian retail investors. 

BT: How much inflow is expected in Indian bond markets?

Nikhil Aggarwal: As per NSDL, for this calendar year, net FPI inflows have already been about $9 billion. Market participants estimate that $20 billion will flow into such bonds in the next 12 months from FPIs.

BT: What should the ideal bond portfolio for new retail investors look like? How much should be invested in government and corporate bonds, apart from equity?

Nikhil Aggarwal: The right combination of bonds and equity is highly dependent on the age, income, and risk profile of the investor. Younger investors looking for growth and having a risk appetite can consider a larger allocation to equity and high-yield bonds. While older investors should consider a larger allocation to government bonds and high-rated corporate bonds.

BT: What are your expectations for the Indian bond market and overall economy going forward?

Nikhil Aggarwal: SEBI Chairperson, Madhabi Puri Buch, recently said, “My name is Bond, Indian Bond." With one of the world’s fastest-growing economies, her statement reflects the opportunity for the Indian bond market. The S&P rating upgrade, the inclusion of Indian government bonds in global indices, and regulatory changes to enable retail investors to have access to the bond market are the start of a new phase of this market. In most developed markets, the bond markets are as vibrant as and, in fact, larger than the equity markets. I expect to see similar growth in the Indian bond market in the years to come.