In a meeting last week, the board of the Securities and Exchange Board of India, the securities market regulator, said that it had approved amendments to the SEBI ( issue of listing of NCD) Regulations 2021. The minimum face value of bonds issued through a non-convertible debenture or NCD offer is now reduced to R10,000 from R1,00,000 earlier.
For now, the corporate bond market in India is primarily institutional. Large financial institutions like insurance companies and mutual funds buy into corporate bonds through fixed-income funds they manage. The Sebi move allows you to use your broking account to buy bonds listed as securities for trading directly. These are non-convertible debentures that offer a coupon rate and trade for a market value based on the bond duration.
Now, you may wonder about the need to introduce it when barely 3-4% of people own financial assets in India, let alone trade and invest in the stock market. You may also wonder about bond duration, coupon rate, yield-to-maturity, and many more new words. The increase in the complexity level of financial markets would put you in a tizzy if you sit on the sidelines looking to invest like most people in the country.
Those who are into the market are surprisingly deep in it. India accounted for over 85% of the total equity index options contracts traded in 2023. According to data from FIA, a global trade organisation for futures, options, and centrally cleared derivatives markets, India’s retail options trading volume has surged dramatically. It was revealed in the US recently that the US-based Jane’s Street Group made $1bn in trading volume betting on Indian equity options.
If you are new to investing, jumping into direct equity or derivative investing is hazardous. Many people follow the herd and invest without understanding where their money goes. A report by the Securities and Exchange Board of India published last year highlighted that 9 out of 10 traders lose money in the equity futures and options market. The dramatic surge in trading in equity index options shows that few are aware of the risks associated with trading in that segment.
Financial markets are way more sophisticated than you think. The Jane’s Group story is an exception and not a norm. Knowing everything about finance is not easy if you do not belong to the sector. Even if you are familiar with the financial sector, you must know about the risks associated with every security that trades in the markets. Equity, bonds, commodities and derivatives markets collectively can offer you a variety of avenues to invest. For a country moving on the path of long-term high growth, a retail bond market can be a boon to you.
You may think that fixed-income markets like retail bond markets are a way forward. However, that also requires you to understand many things. The future inflation risk drives bond markets. That determines the trajectory of interest rates. Further to that is the element of credit risk. Governments top corporates issue bonds to mobilise long-term capital to fund growth. Corporate bond rates are typically higher than the sovereign bond rates. If there is a hint of a spike in the inflation rate, bond prices change dramatically. Short-term trading in bonds is fraught with interest rate risk and credit risk.
What can you do
You must look forward to the opportunity of investing in the bond market if you are already an equity investor. It is an excellent way to balance your investments. However, it is vital to arm yourself with knowledge. Investing without learning is like taking a shot in the dark. You will lose money and then never return to the capital market.
If you are a regular investor in direct equities, you must read up about the new retail bond market opportunity. It would be a good idea to create a portfolio of top-rated bonds. Understanding the credit ratings will allow you to take the necessary call. If you are not regularly investing, you must talk to a professional advisor as a first step.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)