Fixed income needs to be an elemental part of portfolio, says Shyam Maheshwari who shares his perspective on the increasing significance of fixed income in the global investment portfolio. Bank deposits, savings accounts, etc generally 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 assesses that in the global market, fixed income dominates the investment portfolio and the much talked about 60:40 (Stock: Fixed Income) portfolio is a reflection of it. Granted emerging markets are more ephemeral Hence one would want to be compensated to take the risk and this is rightly available in the equity world. Equity-heavy, real estate-embedded portfolios have idiosyncratic risks in times of downturn and need for liquidity, Shyam Maheshwari analyses.
High-grade issues dominate Indian bond market. This includes government-linked companies and government bonds form the dominant portion. According to Shyam Maheshwari, 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. 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.
In Shyam Maheshwari’s detailed study of the economy, the high-yield market is all but non-existent in India. A simpler analogy would be stock markets. He quotes the example of stock exchange to clearly elucidate the situation. If you imagine the stock exchange with only blue chip companies being allowed to list, you can find that it would make the markets very boring, not giving a choice of the risk-reward spectrum to investors.
But in practice, the market has choice of blue chips all the way to small caps and retail investors are making those choices every day – in an environment where the regulators are ensuring proper disclosure and regulatory actions. Shyam Maheshwari stresses that same should be the case for bonds. “There is no reason not to have choices of bonds from AAA to CCC and with appropriate disclosures, the investors would make their decision”, he points out firmly.
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