Startup or Bond? Here's What Small Investors Should Keep in Mind

The Securities Exchange Board of India's (SEBI's) decision to slash the face value of debt securities from Rs 1 lakh to Rs 10,000 marks a significant shift in the investment landscape, particularly for retail investors. This move is seen as a game-changer, making bonds more appealing and accessible to a broader segment of investors. With market experts predicting an imminent reversal in interest rates, the timing couldn't be better for Indian retail investors to diversify their portfolios with bond investments alongside equities.

Before delving into startup or retail bonds, investors should weigh the risks and benefits. SEBI's recent decision to lower the face value of debt securities has stirred the investment landscape, making bonds more accessible to retail investors. While experts predict potential gains amidst an anticipated interest rate reversal, thorough investor education is crucial to navigate this evolving market. Experts highlight the significance of educating small investors for meaningful impact in the corporate bond market. As retail participation surges, market dynamics shift, potentially influencing interest rates and liquidity, thus affecting the broader investment spectrum, including startup ventures.

Hence, understanding the nuances of bond investments becomes imperative for informed decision-making among investors.

Prakash Chawla, Independent Senior Business Journalist cum Analyst, told TICE News, “SEBI move to rope in small investors for corporate bonds laudable, but requires education for real impact.

Reduction in the face value of corporate bonds from Rs 1 lakh to Rs 10,000 by market regulator SEBI , can  bring the debt market within the reach of small investors  not only helping them to get better returns on their savings but also deepening  the bond market with retail participation. But the impact would not be seen immediately, though the move is laudable.”

Impact of SEBI's Move on the Bond Market in India

SEBI's decision to reduce the face value of corporate bonds will reshape the Indian bond market landscape. By making bond investments more attractive and accessible to a wider array of retail investors, this move could significantly boost participation from non-institutional investors.

With the reduced investment threshold now standing at Rs 10,000, even ordinary investors can enter the bond market fray, leading to a surge in bond issuances and heightened trading activity in secondary markets.

As retail investors make an entry into this segment, market liquidity may see a notable uptick, enhancing price efficiency and expanding the investor base for bond issuers.

Mr Chawla says, “Retail participation lends a  decisive  depth to the financial markets, as has been seen in the equities. The number of demat accounts in India have surged to near about 150 million, witnessing a jump of 40 million within a year or so, thanks to retail investors' fancy for the stocks. Can we witness a similar thing in the bond market, especially in the corporate bonds?” 

Is it time for Indian investors to consider bond investment?

As experts often emphasize, a well-diversified portfolio is key to long-term wealth creation, with fixed-income investments playing a crucial role. Amidst the current financial landscape, the bond market presents itself as an attractive avenue for investors, offering higher returns compared to traditional fixed deposits with relatively lower risk than equities.

Mr Chawla says, “The SEBI's decision would no doubt facilitate retail participation in the bonds market, but the extent of rush witnessed in the equities , would be a long haul, if not impossible!. Appetite for the debt instruments, considered as a safer bet than the equities, amongst the small investors may not be big enough to cause any concern for the banks which are offering attractive rates on fixed deposits , between 7-8 per cent, giving a real interest of 2.5 -3 per cent after factoring in inflation. While the bond yields may be higher , the arbitrage would not be tempting for the small investors to shift from a simple , easy to operate FDs with the banks to a complicated bond market. Investors would need a lot of education in terms of trading dynamics of bonds and  day to day changes  in their rates. Besides, those with large debt portfolios may engage professionals advising them but small investors may not be attracted towards the corporate bonds , at least for now. 

Moreover, while bonds  are less risky than equities, they are certainly riskier than the bank FDs. After all, we are not talking about the government bonds but the instruments by the corporates.   In fact, there is a virtual nil risk in the bank deposits from a practical standpoint even though the insurance risks for the same is limited to Rs 5 lakhs in an individual bank.  

So, the SEBI move to bring in larger participation of retail investors in the bond market is certainly welcome, but  it would require a lot of hard work, education to deepen the debt market, for sure!”        

Diversifying one's portfolio with bonds is essential, however, investors must conduct thorough evaluations of various debt instruments, considering factors such as return potential, tax implications, liquidity, credit risk, and interest rate sensitivity.

The recent move by SEBI to lower the face value of corporate bonds has made them more accessible to retail investors, facilitating seamless integration into investment portfolios. Bonds provide benefits such as stable income and reduced volatility compared to stocks.

Furthermore, with interest rates nearing their peak and anticipated to decline in the near future, investing in bonds now could not only generate interest income but also offer potential capital gains over the next 12-18 months. As such, Indian investors may find it prudent to explore bond investments as part of their wealth-building strategy.

What to Consider Before Investing in Corporate Bonds

Investing in corporate bonds demands careful consideration due to inherent risks, particularly single-issue risk. It's advisable to opt for corporate bonds only when the yield advantage adequately offsets this risk and tax inefficiencies. For investors in tax brackets exceeding 10 percent, tax inefficiency becomes a concern when comparing corporate bonds to alternatives like arbitrage or multi-asset funds. However, if corporate bonds promise double-digit returns and you fall within the 10 percent tax bracket, they might be a viable investment option worth exploring. Evaluating these factors is crucial before diving into corporate bond investments.

Will SEBI's move potentially impact on startup investments?

The reduction of face value for bonds by SEBI could indirectly impact startup investments in several ways. Firstly, with bonds becoming more accessible to retail investors, startup investors might opt for diversification by including these stable fixed-income securities in their portfolios, mitigating risks associated with startups. Secondly, the increased participation in the bond market could influence interest rates and liquidity, thereby indirectly affecting the broader investment landscape, including startup investments. Additionally, the availability of bonds as a perceived safer investment option might alter investor behaviour, leading some startup investors to allocate funds towards bonds. However, this could also pose competition for startup investments, potentially diverting capital away from early-stage ventures if bonds offer more appealing returns or lower perceived risks.

Overall, while SEBI's move directly affects the debt market, its ripple effects could influence investment decisions and behaviors among startup investors, adding another layer of complexity to their investment strategies.

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