Bond Investing Just Got More Accessible For Retail Investors

The Indian bond market has traditionally been dominated by institutional investors, with high minimum investment requirements acting as a barrier to retail participation. However, recent regulatory changes by SEBI (Securities and Exchange Board of India) have made bond investing more inclusive and accessible to individual investors.

In line with SEBI Chairperson’s vision of “sachetizing” financial products, the minimum ticket size for bond investments is getting reduced to ₹10,000. This move addresses a major hurdle that previously made it challenging for retail investors to diversify their bond portfolios, as the earlier minimum investment of ₹1 lakh proved prohibitive for many. 

The timing of this regulatory change couldn’t be more opportune. Over the past two years, several developments have made bonds an increasingly lucrative asset class for retail investors:

1. Tax Arbitrage Diminished: The tax advantage enjoyed by debt mutual funds has been reduced, making direct bond investments relatively more attractive.
2. Regulatory Stance on P2P Lending: There are a lot of regulatory changes happening in P2P products, which may make the product unattractive to investors.
3. Attractive Returns: With fixed deposits of large banks offering only 7-8% returns, bonds from even A-rated entities are currently yielding 10-11% returns, making them a compelling investment option for those seeking higher returns.
4. Regulatory actions against unregulated products: Regulators have been taking actions against investment products like leasing, farm investment, etc making these products unattractive. In contrast to this, “bonds,” which are SEBI-regulated instruments, are finding a lot of interest among investors.

One of the key advantages of bond investments is the availability of senior-secured bonds. In the Indian bond market context, “senior” implies that these bonds have a higher claim on the issuer’s assets and cashflows in case of default or bankruptcy. “Secured” means that the bonds are backed by collateral, providing an additional layer of protection for investors. Investors should note that there are unsecured and subordinate(junior) bonds as well in the market – however these bonds can be avoided due to much higher risks compared to bonds that are senior secured. Unsecured bonds are not backed by any collateral or security, and subordinated, or junior bondholders have a much lower priority on the company’s assets in case of any defaults.

The reduced minimum ticket size has the potential to create a virtuous cycle in the bond market. As retail demand for bonds increases, issuers are likely to view this form of fund-raising more favorably, potentially leading to a wider range of bond offerings tailored to meet the needs of individual investors.

It’s worth noting that while bonds offer attractive returns, they also carry risks, such as credit risk, liquidity risk, and interest rate risk. Investors should carefully evaluate the creditworthiness of the issuer and consult with financial advisors to ensure that bond investments align with their risk profile and investment objectives. Also, investors should avoid parking emergency funds in bonds and invest with a view to “hold till maturity” since even though bonds are listed on the exchange, liquidity is not guaranteed. However, with the bond market expected to now deepen after the recent SEBI reforms, it is expected that the liquidity of the bonds may improve going forward. Lastly, investors should always diversify across at least five bonds and not part all the money in just one or two bonds. This helps in mitigating credit risk and liquidity risk at a portfolio level.

RBI also is trying to do its part to deepen the bond markets. For the purchase and sale of government securities, including sovereign gold bonds, a dedicated portal has been started by RBI-  https://rbiretaildirect.org.in/. More than one lakh users have already registered on the portal as of April 2024, and more than Rs. 5000 Cr worth of transactions have happened.

Note that investing in the bond market comes with its own risks and rewards, as with any other asset class. Lowering the ticket size gives retail investors access to a new asset class, but that doesn’t mean it suits everyone. One has to assess whether they have the risk appetite to get into corporate bonds and how it compliments the entire portfolio.

In conclusion, the reduction in the minimum ticket size for bond investments to ₹10,000 is a significant step towards democratizing the Indian bond market. With this move, retail investors now have access to a regulated, listed, and rated asset class that offers lucrative returns.