Change in tides toward debentures
The volatility of the equity market has catalyzed a paradigm shift in the investment behavior of Indians. They are seeking out more reliable and lucrative investment options. Topping the list are Debentures, which offer greater stability and profitability. As a result, the Indian debenture market has been growing exponentially in recent years. The Securities and Exchange Board of India (SEBI) reports that the total amount of debenture issuances in India increased from INR 1.26 trillion in 2019 to roughly INR 1.85 trillion in 2021. This indicates the growing trend of investing in debentures.
In recent times as the Equity and Real estate markets are unstable, investors have embraced debentures more and more as a tool to generate a better return.
The Indian economy has always been heavily reliant on banks. However, the corporate bond market has started to take center stage. The whopping number of bond issuance amounting to over RS.7.5 trillion in 2021 gives credence to it. This phenomenal rise of the corporate bond market attests to this shift in the Indian investment ecosystem.
Going forward, the recent news of one of the top most finance institutions raising Rs 25,000 crore through non-convertible debentures may have prompted you to contemplate non-conventional investment options. Yes, it is time to shift your investment portfolio in the right direction. When the economy is volatile, and the investment market reels under issues like liquidity crunch and unpredictability, it is pragmatic to look for diversified investment options that transcend the shortcomings of equity. Because the future of investment lies in diversification and risk management. Accordingly, debentures are viable options that guarantee predictable returns in an unstable market. Realizing the enormous potential debentures hold, risk-averse investors and corporate giants have started adding them to their investment baskets. Hence, whether you’re looking to grow your wealth or protect your assets, debentures offer a compelling option that’s worth considering.
Before making an informed choice, let’s examine the advantages of debentures.
Unlocking the advantages of debentures
A debenture is a type of debt instrument or bond that offers investors a predictable rate of return for a predetermined period. Unlike bonds, debentures do not possess collateral security. The financial market deals with two types of debentures namely convertible and non-convertible. Regarding convertible debentures, it is possible to convert them into the equity stocks of the issuing company after a definite period. However, this conversion is not possible for non-convertible debentures. Now, let’s briefly discuss the advantages of debentures that made them coveted investment options for investors.
Predictable income: Debentures provide a predictable income stream, making them an attractive investment choice for risk-averse investors seeking a steady return. Regardless of market volatility, these products offer stable returns.. Hence they ensure that investors will receive a specific return on their investment.
Higher returns: According to data from the Reserve Bank of India, bank fixed deposits have a maximum interest rate of 7.5% as of January 2023. Debentures, on the other hand, produced larger yields, with an average interest rate of between 8.5 and 10%. It outsmarts the returns of traditional fixed deposits. Thus, in the current economy where the financial market promotes debentures like never before, debenture redemption can offer the best return on investment.
Low-risk profile: Unlike risk-prone equities, debentures are comparatively low-risk investment options. CRISIL’s data demonstrates that, between April 2011 and March 2020, the default rate for AAA-rated debentures was only 0.03%. It underlines the relative safety of debentures as an investment option.
Safety: Debentures are secure investment options because they are backed by the company’s assets. In the event of default, holders are accorded priority over equity holders during the liquidation process. As a result, debenture holders have a higher likelihood of recovering their investment.
Conducive regulatory environment: The Securities and Exchange Board of India (SEBI) has initiated several measures to encourage companies to issue debentures. Accordingly, they have simplified the investment process for small-scale investors to invest in debentures. Additionally, to ensure that investors have access to a wide variety of debentures, SEBI has developed laws that make it simpler for businesses to issue debt instruments.
Let’s have a look at how Non -convertible debentures play in the market.
Non-convertible debentures gaining momentum
More and more businesses are turning to NCD issuance to raise funds. Indian corporates had raised Rs 41 billion between April and October 2022, and the amount is expected to reach Rs 100 billion in 2023. The reason behind the surge of NCDs issuance is India’s low-interest rate ecosystem. The Reserve Bank of India (RBI) has lowered the repo rate by a total of 250 basis points since February 2019 to assist the economy’s recovery from COVID-19. It mirrored the lower interest rates on fixed deposits by banks through an average interest rate of 5.5%. Meanwhile, the average interest rate for NCDs ranged from 8.5% to 10.5%. Consequently, NCDs with their significantly higher interest rate allured investors by leaps and bounds. Further, other factors drive NCDs’ popularity. Let’s glance over the significant ones.
Elements that entice investors toward NCDs
NCDs are easy to trade: Since they are Exchange Tradable debentures, they are gaining popularity, especially among retail investors. According to SEBI data, the total amount of non-convertible debentures issued in 2021–2022 was Rs. 11589.41 Cr.
Tax advantages: Investing in NCDs has tax advantages for investors. The investor’s marginal tax rate applies to the interest earned on NCDs. However, under the Income Tax Act of 1961, the investor can deduct up to Rs. 10,000 from the interest income earned from NCDs.
Transparent credit rating: SEBI’s mandate insists on the credit rating agency’s disclosure of the rationale and methodology for rating NCD issuances. It increased the transparency of the NCD market. As a result, the investor can select the most credible company to invest in. It aids investors in making informed investment decisions.
The above-mentioned factors reiterate debentures’ potential to generate more profitable and predictable income than any other traditional investment options. However, it is important to ensure that the debenture market holds a vibrant future. With the policy initiatives of the Indian government, the debenture market exudes stability and growth. Let’s get a quick glance.
Future outlook on the debenture market
The Indian corporate bond/ debenture market is going to register an upward trend in the growth trajectory. The boom of Indian infrastructure development and the rise in retail investors will accelerate the growth even further. Moreover, the Indian government’s Insolvency and Bankruptcy Code (IBC) has aided in strengthening the legal foundation for bond/debenture holders. It ensures greater protection for investors. Additionally, the proposed development of a corporate bond market development fund will help in expanding the corporate bond market.
Conclusion
‘Assetify’ also offers investment opportunities through Non Convertible Debentures. For more information please connect through Email : iftekhar@assetify.in or Mobile : +91 7066122226