Bond markets may be the new norm in the upcoming decades like equity market currently is. In an analysis of the same, Shyam Maheshwari explains the significance of bond markets and fixed income markets in India’s economic scenario.
Fixed income should be a core part of any portfolio, Shyam Maheshwari asserts. “Generally, bank deposits, savings accounts, etc formed the base for fixed income. However, over time mutual funds with liquid plans gave better tax-adjusted returns than bank deposits shifting the preference for savers. However, direct bonds, Non-Convertible Debentures, securitised products have not gained traction in our portfolios due to a lack of investor awareness as well as risk pricing of these alternatives”, he details.
Shyam Maheshwari also gives a picture of the global markets where in contrast to this, fixed income dominates the investment portfolio. The much talked about 60:40 (Stock: Fixed Income) portfolio is a reflection of it. According to Mr. Maheshwari, Indian market is not able to achieve this feat as Indian bond market is dominated by high-grade issues. These includes government-linked companies and government bonds forming the dominant portion.
“While high-quality corporates have tried to diversify their funding by accessing the capital markets, the reliance on bank finance still dominates the funding plan. Government bonds, PSU bonds and high-grade corporates (AAA or AA rated) are more of interest-rate products than credit. Their returns are mostly a function of prevailing interest rate and expected interest yield curve — less linked to the credit quality of the borrower given the high quality and tight credit spread”, Shyam Maheshwari adds.
While the mutual fund is a good way to participate in the bond markets, there should also be an opportunity to construct a dynamic portfolio based on personal preference of individual bonds, says Shyam Maheshwari who has a strong opinion that unless there is concentrated effort from multiple angles to develop the markets, it would take much longer for the markets to develop on their own. Shyam Maheshwari provides some tips that could be helpful in particular to the Indian context:
· Encouraging individual participation in the bond market. This can be done by reducing the denomination of bonds, providing tax incentives and improving disclosure of issuers that would give confidence to the retail investors.
· Allowing financial institutions such as pension funds and insurance companies to invest in sub-investment grade bonds — albeit slowly. This would allow institution-level scrutiny of the credit quality of the issuer.
· Simplifying the tax deductions for the issuer without having to know the status of the holder. The onus should shift to the holder to pay their taxes other than foreign investors.
· Allowing tax deduction for leveraged buyout transactions.
Shyam Maheshwari gives prominent emphasis to the fact that India would need a well-functioning bond market alongside its relatively developed equity markets to provide the necessary financing to the industries for their growth needs in the times to come as the country embarks on high single-digit GDP growth over the next decade or two. After all who knows if the bond market will develop multi-fold making the markets more vibrant and deeper in the years to come?
