Retail investors can now diversify into multiple bonds with a single investment, starting at Rs 1 lakh.
Bengaluru-based fixed-income platform Wint Wealth on Monday launched its new Securitized Debt Instrument (SDI) offerings, i.e., a basket of bonds that allow investors to invest in multiple listed senior secured bonds with a single investment starting at Rs 1 lakh.
As per SEBI regulations, the minimum face value of listed debt securities under private placement is Rs 1 lakh. Since most corporate debt securities are privately placed, many investors cannot explore corporate bonds as an asset class due to the high-ticket size. Even if they purchase a few units, the portfolio has a concentration risk. Wint is now offering a basket of bonds with multiple senior secured corporate bonds as underlying assets. This allows investors to diversify their investment across multiple senior secured bonds by investing in a single SDI.
“Similar to equity, bond portfolio also need diversification for risk mitigation. Ideally, retail investors should allocate 5-10% of their portfolio to bonds to realize any meaningful gains. Retail investors must spare at least Rs Rs 5-6 lakh to build a diversified bond portfolio. Very few retail investors can afford to do so. However, with Wint Basket, more retail investors can now consider building a well-diversified corporate debt portfolio,” said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.
Similar to loans, bonds also is a debt given by the bondholder to the borrower and leads to generation of future cashflows(also called receivables). As per SEBI regulations, receivables arising out of securities can form part of the underlying pool.
For example, the September-October basked consists of 9 bonds issued by different non-banking financial corporations. The basket has an investment period of around 15 months, and the average yield is 10.5 per cent XIRR. The NBFCs chosen include Aye Finance Private Limited, Akara Capital Advisors, Clix Capital Services, Ugro Capital Services, Neogrowth Credit Private, Krazybee Services and Virviti Capital. The maturity of the bond is on 8 January 2025.
The interest rate on the SDI is 10.03%, payable on a monthly basis. Therefore, it translates to 10.5% XIRR effectively.
The interest received on SDIs is taxed at a slab rate. A TDS of 25% will be applicable.
Amount of interest for the previous month plus partial repayment of principle is done every month. The periodic repayment ensures gradual reduction of risk.
The underwriting of the securities is performed by an in-house credit team wherein the financials, operational parameters, growth factors and corporate governance of the Issuer is analysed and accordingly the exposure is determined.
Corporate bonds provide higher rates compared to fixed deposits. For instance, while corporate bonds offering a rate of 9-11 per cent, fixed deposits are offering an average interest rate of 6-7 per cent for a tenure of one to three years. However, corporate bonds carry more risk than fixed deposits.
A bond will quote at a premium to the face value if there is a credit rating upgrade, fall in interest rates in the economy or positive investor perception. It can also quote at a discount if there is a rating downgrade, increase in interest rates, investor disinterest or lack of liquidity. It is also important to carefully assess the credit quality of the issuer before investing or consider investing in them through a diversified debt fund.
Credit risk: Since the amount is not invested in a single bond, even if 1 NBFC defaults, you do not lose your entire investment unlike a regular bond. However, this does not make it risk-free even though this bond has a security pool, complete investment recovery is not 100% guaranteed.
Liquidity Risk: Although this is a listed asset, buyers in the market aren’t always guaranteed. There is a risk of not finding a buyer when you wish to sell this bond. If you reach out to Wint, they will try their best to find a buyer. However, there is no guarantee that such a buyer will always be present.
Fraud Risk: Like all investment products, some fraud risk is present in this asset class as well. There is a risk of an NBFC sharing false information at the time of investment. In such a scenario, legal actions will be taken against those involved, but the money invested might take a while to be recovered or be unrecoverable in some cases.
“Debt fund portfolio diversification is essential for fixed-income investors because it helps spread risk and enhance overall portfolio stability. By investing in a diversified portfolio of bonds with varying maturities, credit qualities and issuers, you can reduce the impact of defaults or interest rate fluctuations on investments. Diversification ensures that probability of a single bad investment doesn’t have a catastrophic effect on their entire portfolio,” said Vishal Goenka, Co-Founder of IndiaBonds.com.
For those who have just entered the workforce and want to start investing in bonds, Goenka offers some valuable advice:
a. Understand the basics of bonds: Learn what bonds are, how they work, and the different types of bonds available. Bonds are for stable regular income and capital preservation.
b. Risk assessment: Assess your risk tolerance and investment goals to determine if bonds align with your financial objectives.
c. Diversification: Explore the importance of diversifying your asset portfolio and bonds offer the right diversification effect. Within bonds also one should diversify to manage risks effectively.
d. Research and due diligence: Learn how to research bond issuers, evaluate credit ratings, and assess the overall financial health of potential bond investments.
e. DIY investing: Understand how to buy bonds directly through an online bond trading platform for a more hands-on approach.
f. Keep Learning: Continuously educate yourself about bond markets, economic factors that affect bond prices, and strategies for optimizing your bond portfolio.
On an initial investment of Rs 10,000 in bonds, a first-time job candidate with a monthly take-home salary of Rs 25,000 can earn a regular monthly income through the interest payouts generated by their bond investment
To estimate the monthly earnings, you can use the following steps:
Identify the annual interest rate (coupon rate) offered by the bonds.
Calculate the annual interest income by multiplying the bond investment amount (Rs. 10,000) by the annual interest rate. For example, if the bond has a 10% annual interest rate, the annual interest income would be Rs. 10,000 x 0.10 = Rs. 1,000.
Divide the annual interest income by 12 to determine the monthly interest income. In this case, Rs. 1,000 / 12 = Rs. 83.33
So, with an initial bond investment of Rs. 10,000 and a 10% annual interest rate, the first-time job candidate could earn approximately Rs. 83.33 per month from their bond investment.
It’s important to note that the actual earnings may vary depending on the specific terms of the bonds and market conditions. Additionally, this is a simplified calculation and does not account for factors like taxes or potential changes in interest rates over time.