The Stock Market and Stock Market related instruments like Shares & Mutual Funds have been discussed on numerous occasions in this blog. One thing which we have not covered in detail here is about the Debt Markets of India. Part of the reason being the fact that Debt Markets are considered Safe Havens and so, most people (including me) don’t really care about it until they are in their late 40's to 50's. Well, I recently realized that it was a grave mistake and so, here we are...
This and a few more articles that will follow will cover in detail about the Debt Markets in India, the type of Debt Instruments we can invest in and other relevant details that you will need to know before actually investing in such products.
Even the most aggressive investor needs to have at least a 15 - 20% exposure to Debt Instruments to cushion losses and provide much needed liquidity. So, even if you are young and can afford to bear losses, I would suggest you strongly consider Debt Instruments to constitute at least 20% of your portfolio
Why Do We Tend to Overlook Debt Markets?
The Answer is very Simple: Rate of Returns
Most people are excited about Equity Markets because they tend to offer much higher rates of returns at much shorter timeframes. For some people, it motivates them to be aggressive risk takers who try to double or triple their money in a short span of time. For the others, the risk factor keeps them away from the Equity Markets. Irrespective of which category you fall into, most people are excited about equity markets and are more interested in learning about them than the Debt Markets.
Equity markets are a great choice for earning higher returns over the long run, but do remember that high returns do entail high risks too. It means you need to put your invested capital at a risk and
that too without any expectation of preserving your capital (i.e. You May End up losing all the money invested). And so to reduce the risk or to preserve your capital, you need an asset class which performs the function of preserving or protecting your capital from eroding. It is not something new we are talking about. Instead, this asset class is a traditional asset class which existed even much before ‘equities’ became popular and exciting as an asset class.
Yes, We are talking about "Debt Instruments".
Capital Preservation is one of the biggest motivators for people to invest in Debt Instruments.
What is meant by the word "Debt"?
Debt, in simple terms, is an obligation or a commitment from the borrower to repay the money borrowed from the lender on or before a pre-specified date. In return, the borrower will pay the lender an additional sum to compensate for the lender parting with their money.
Real Life Examples:
1. Home Loan
2. Car Loan
3. Bike Loan
4. Personal Loan
How Big is the Indian Debt Market?
India’s debt market is one of the largest debt markets in Asia, and serves as a useful source for banking channels to meet their financial requirements. In terms of size, the Indian debt market is the third largest in Asia after Japan and Korea. The Indian debt market has grown massively over the years. Before 1990’s the debt market in India was characterized by administered interest rates i.e. the interest rates were closely monitored and fixed by the Government. Also the high Statutory Liquidity Ratio (SLR) requirements led to the existence of captive investors in banks in the absence of a liquid and transparent secondary market. The coupon rates offered on government securities too, were not market determined.
Such was the crude and unsystematic form in which the Indian debt market existed earlier. However, through various reforms in phases over the past 20 years, the Indian debt market underwent a process of a structural overhaul wherein the captive debt market was transited to a more dynamic debt through market-determined interest rates, which in turn brought about the much needed transparency and liquidity into the Indian debt markets.
Worldwide debt markets are three to four times larger than equity markets. Even in India the ratio would hold good if we consider Bank Deposits as part of the Debt Markets in India. Unfortunately most people still think of "Bank Fixed Deposits" the moment we talk about debt instruments and so a huge or should I say the largest chunk of Debt Investments in India cannot be considered as part of the Debt Market.
So, the debt market in India is very small in comparison to the equity market. This is because the domestic debt market has been deregulated and liberalized only recently and is at a relatively nascent stage of development. The debt market in India is comprised of two main segments, the Government securities market and the corporate securities market. Government securities form the major part of the debt market, accounting for about 90-95% in terms of outstanding issues, market capitalization and trading value. In the last few years there has been significant growth in the Government securities market. Even the Corporate Securities Market is growing well of late. Many high profile bond/debenture issues amounting to multi-thousand crores of rupees have been successfully offered and subscribed in the past few years.
In the next 5-10 years, the Indian Debt Market has the potential to surpass the size of the Indian Equity Markets many times over, just like it is in other major nations worldwide.