0
The financial market of a country develops only when there is growth in each and every segment. In India the equity market has performed quite well over a period of time, and on the other hand the debt market has also grown immensely but it faces problem of visibility lack of knowledge to investors. The Indian debt market is the 4th largest in Asia while Japan is the leader followed by China and South Korea. A well developed debt market can play an important role in supporting the economic and infrastructure development of a country. Its primary purpose is to provide long term financing for both government & private projects.
In the current scenario for investors who are looking for low risk investments can enter the debt market. Debt or the Fixed Income market is often overlooked by investors because it is less volatile than equity market and it is also difficult to understand and operate.
A bond is just like a loan where retail investors, mutual fund companies, financial institutions, banks invest in bonds issued by government and corporate companies to raise capital for their operations. They are considered safer than equities and other financial instruments. The investors are paid at interest at specified intervals at a fixed rate of interest which is known as coupon rate and at the end of term or maturity period the capital is also returned.
There are two types of bonds mainly: Corporate and Government bonds.
Corporate bonds are issued by private companies in the primary market and they pay a higher rate of interest in comparison to government bonds. In Indian we have companies such as L& T, Shriram Finance, Muthoot Finance issuing bonds. Corporate bonds also have issue convertible bonds which can be converted into an equity share after a certain period of time.
Government bonds are issued by the government entities to finance their activities and are also known as G-sec. Government bonds are considered a very low risk option. The government bond market size is much larger in comparison than the corporate market size in India.
The Indian debt market has been seeing a lot of funds flown in from internal sources like mutual funds, insurance companies, retail investors and external sources such as FII’s. Below is a table showing the investment pattern of different countries into the debt market.
| Percentage wise investment into G-secs: | ||||||
| Country | Central Bank | Government subsidiaries | Banks | Insurance companies | FII | Others |
| China | - | - | 77.1 | 5.4 | - | 17.5 |
| Indonesia | 4.5 | - | 33.7 | 17 | 32.5 | 12.3 |
| Japan | 18.6 | 8.5 | 33.4 | 22.9 | 8.3 | 8.3 |
| South Korea | 2.5 | 20.2 | 17.9 | 29 | 9.2 | 21.2 |
| Malaysia | 0.6 | 1.4 | 27.9 | 40.7 | 29.4 | - |
| Thailand | 6.7 | 1.2 | 11.9 | 50.2 | 17.4 | 12.6 |
| India | 16 | - | 38.2 | 26.6 | 1.4 | 16.3 |
- Bonds with a higher credit rating always have the least risk of defaulting.
- Bonds are a very good investment option for the people who are looking for a regular source income.
- There is safety of your principal amount that you have invested
- They provide interest rate higher than most banks
- Bond market also faces certain risks such as credit risk which is if the issuing company defaults against payment and the other is the interest rate risk.
- Interest rate risk and coupon interest of bonds have an inverse relationship. When one rises the other falls and vice versa.
- Issuing of debts is also better for companies than taking loans from banks
The Indian bond market has witnessed a significant growth in the past few years. This is primarily because of its high liquidity nature. In addition, the increasing stability of the stock market has fuelled the growth of bonds. The mood is upbeat and Indian bonds have been able to get more business within a short span of time in recent years. Compared to China, the Indian bond market is stronger and is profitable as well. Most of the countries have the debt market dominated by the government sector. The bonds are also traded in the secondary market and India has very high turnover ratio compared to the other economies.
India needs to give more exposure to its corporate bond market since it is lagging behind the government bonds. Looking at the growth in the market cap the debt market is expected to cross $ 160 billion by 2018. It’s a very good time to look out for opportunities in debt investment due to falling interest rates and extreme volatility of the stock and commodities & currencies market.
