Fixed income dominates the investment portfolio in the global market. But this not the general case in India. According to the financial expert Shyam Maheshwari, fixed income should be a core part of any portfolio just like bond markets. The financial expert is of the opinion that this is mainly because Indian bond market is filled with high-grade issues.
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.
Shyam Maheshwari brings to the limelight the issues prominent in Indian bond market. The government-linked companies and government bonds form the dominant portion of this market. 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, the expert says.
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 provides an example for illustration purposes. The rating difference between JSW and G-sec is only one-notch in India, and the spread difference that one can get for the extra risk is 86bp.
Snapshot of Indian NCD
Note: There are no hedging instruments for 10 years. Have used 4.5% as illustrative hedging cost which is empirically true over the past.
The high-yield market is all but non-existent in India. But Shyam Maheshwari despises this saying that there should be choices of bonds in an environment where the regulators are ensuring proper disclosure and regulatory actions and the investors can make their decisions. In global markets, this has been the norm. From AAA rates US Treasury to high-grade corporates but also extending to emerging market bonds as well as high-yielding bonds have been available to investors with certain disclosures and eligibility criteria. Shyam Maheshwari provides an illustration to clearly state the significance of bonds in the economic spectrum.
Snapshot of USD Bonds
Note: Rating by S&P, Bonds are just illustrative of the asset class/rating category. There are thousands of bonds in each such class/rating category to choose from.
The bonds of P&G are compensating investors by 56bp over the risk-free US Treasury — a kind of similar analogy of JSW versus G-Sec in India. However, the rating divergence of JSW in the USD bond market is more. As India does not have USD bonds issued by the government, there is no way to compare what JSW is paying as a premium over Indian sovereigns in the US markets. In absolute terms, USD bonds pay higher than INR NCDs due to the peculiarity of the INR markets, and partial capital controls in India. There is a jump in yield premium as one moved from investment grade to high-yield bonds.
While the mutual fund is a good way to participate in the bond markets — very similar to the mutual funds for equity markets — there should also be an opportunity to construct a dynamic portfolio based on personal preference of individual bonds, Shyam Maheshwari asserts.