Debt Market: India
There are two kinds of investors in the market one is risk-taker & other is risk-avoider. The Risk-taker (Aggressive Investor) always makes investment in risky instruments like equity for instance & end up making either huge profits or huge losses. But those who are risk avoiders (Conservative Investors) always choose an option which is least risky. India is a risk averse country especially when it comes to investment and hence most of the investors park their funds in Fixed Deposits due to its least risk feature. But there are various debt instruments which Conservative Investors can opt for, to earn higher returns than FDs.
Before proceeding further let us explain; “What are Debt instruments?”; Debt Instruments are obligation of issuer of such instrument as regards to certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Today let’s discuss debt investment opportunities prevailing in India:
- Bonds: It is a debt instrument which is simply called “IOU”- I Owe You, in which an investor agrees to lend money to a company or government for a particular period of time in exchange of pre-determined interest rate. Various types of bonds issued in the market are – Government Bonds, Municipal Bonds, Institution Bonds, Corporate Bonds. Each bond has different risk & return involved in it. For example, Government bonds having sovereign rating (backed by Government) have the lowest risk & lowest return. On the other hand, there are corporate bonds which may vary in terms of risk return depending upon financial health of company.
- Debentures: These are similar to bonds but they are mostly unsecured loans unlike bonds which are secured & backed by assets of the company. Simply put, debenture is a long-term debt instruments used by Government or large companies to obtain funds which are not secured by the any asset. These instruments are little riskier than bonds as they are not backed by any lien of assets. There are some more differences between bonds & debenture which you can read from our earlier blog; https://financialbook.in/2017/05/09/bonds-vs-debentures-whats-the-difference/
- Commercial Papers (CP): CPs are also unsecured money market instruments which are issued in form of promissory notes. These were introduced in India in 1990s & are used for short term borrowings by the companies. Investment is done in denomination of 5 lakhs or more for a duration ranging between 15 to 365 days.
- Certificate of Deposits(CD): CDs are financial products usually issued by banks, institutions or Credit Unions. These are regular term deposits often for 3 months, 6 months,1 year & 5 years having fixed interest rates which are usually higher than the rate offered by banks on Fixed deposits.
- Government Securities: Commonly these instruments are known as G-secs which are issued by RBI on behalf of Government of India. These include Central G-sec, State G-sec, Treasury Bills. These are mostly issued in face value & do not carry default risk as they are sovereign rated. Maturity ranges from 2 years to 30 years. There is no TDS as well.
- National Savings Certificate: NSC is a fixed income long-term investment. It is issued by authorized post offices with a rate of return of 8% for maturity period of 6 years. It needs minimum investment of 500 and there is no maximum limit. Its also qualifies for deduction u/s 80C. There is no TDS also.
These points have already highlighted that investment in debt market is much better than the fixed deposits. So rather than going for FDs investors must evaluate the profits that can be earned from debt instruments without using aggressive investment techniques.