When you construct your investment portfolio, you want to protect your money and grow it to beat inflation. You know the value of your hard-earned money because you got there with a considerable effort. You have made sacrifices to save money and worked harder to make more money. Letting it go to inflation or factors that are not in your control can make you uncomfortable.
The world now is going through immense uncertainty. Global trade wars, regional conflicts, technology disruptions and local demand and supply issues are making it harder for policymakers and analysts to determine the future trajectory of inflation, interest rates and economic growth. There are green spots in all crises. This time, you can see top investment firm analysts pointing at those green spots but lacking conviction in their commentary. There are a lot of ‘ifs’ and ‘buts’ in every potentially attractive story. For example, many global banks are divided over India’s attractiveness as an investment destination for foreign investors. Domestic mutual funds hold a significant amount of their portfolios in cash to protect their schemes from losing value in volatile times.
Diversification is the key
Ensuring sufficient portfolio diversification is the only way to deal with uncertainty and volatility. India’s financial markets offer you diversification into multiple assets like never before. You can directly buy stocks, bonds, commodities, real estate or infrastructure investment trusts that offer varying returns. A new consulting paper for comments by the Securities and Exchange Board of India highlights letting mutual funds own more units of real estate and investment trusts than before through hybrid schemes, considering investment trust or real estate trust-specific schemes and including them in benchmark indices.
REITs generate their income through commercial property rent. Investment Trusts generate their income through tolls on roads. With rapid urbanization, there is likely to be a significant jump in the sale of commercial property and physical infrastructure assets like roads and the sale of conventional and non-conventional power.
According to a recent speech by Sebi’s whole-time director Ashwani Bhatia, the potential for you to invest in government and corporate bonds, ReITs and investment trusts (InvITs), and even municipal bonds in the future could be immense.
REITs in India only account for about 10% of the country’s total listed real estate value, covering nearly 126 million square feet. That is far lower than the over 90% seen in developed markets such as the USA and UK. “This gap presents substantial growth opportunities and highlights the need for further promotion of REITs and InvITs, alongside the development of regulatory frameworks to support their expansion,” he said in the speech.
In the same breath, the Sebi director highlighted the potential for the bond market. Despite efforts to encourage increased trading in listed government and corporate bonds, the debt market in India does not see significant investor participation. India’s bond market value is 0.65 times the equity market. In contrast, bond markets in the US and Japan have a market value of 1.2 to 2 times the size of equity markets. That shows a higher interest in the risky equity markets and low investor interest in the bond market despite generating fixed returns. In 2024-25, Indian companies raised a record $124bn by selling corporate bonds. Despite that, the corporate bond market accounts for only 18% of the gross domestic product, against 80% in Korea and 36% in China.
The next frontier could be Municipal bonds. The government allowed municipalities to access financial markets to raise money through the issue of bonds in 2015. Since then, 13 municipalities raised over Rs 2,834 crore ($ 329m). As of December 2024, the value of municipal bonds in the United States stood at over $4.1 trillion. The municipal bond ecosystem can add further depth to your fixed-income investments.