In 2022, SEBI brought online bond platforms under a formal regulatory framework. That made it much easier for retail investors to buy bonds.

And in fact, industry estimates show that people are putting anywhere from 1500-2000 crore a month in corporate bonds versus 300 crore a year earlier.

But here's the thing, although it's much easier to buy bonds, do investors really know what they're getting into?

In addition to understanding yield rates, investors also need to understand things like credit ratings, tenure, and liquidity.

As well, the same bond can have one yield rate on one platform and another on a different one.

So as the corporate bond market is growing, do investors understand the risks?

To hear from experts and retail investors on this, tune into the latest episode of The Signal Brief.

The Core produces The Signal Brief. Follow us wherever you get your favourite podcasts.

NOTE: A machine transcribed this episode. A human has looked at this text but there might still be errors. Please refer to the audio above, if you need to clarify something. If you want to give us feedback, please write to us at feedback@thecore.in.

TRANSCRIPT:

Kudrat (Host): Shashank, who teaches an MBA course, began his investing journey in 2009.

At first, it was mutual funds, fixed deposits. Soon, he branched into equity.

More recently, Shashank has been dabbling in another financial instrument: corporate bonds.

Shashank: Recently, from the last two years, I thought to diversify my investment, even in bonds as well.

The reason was, like, I'm planning for my retirement in the next three, four years, so I thought I should diversify, uh, like a certain percentage of my portfolio in corporate bonds.

Kudrat (Host): Shashank uses Wint Wealth and Stable Money to invest.

He told me that prefers the former, since their team is more responsive.

This habit of tapping on an app and buying a corporate bond was practically non-existent for retail investors like him just a few years ago.

In 2022, SEBI wrote rules that let retail investors buy bonds online. After that, platforms crowded in. Wint. Stable Money. Bondscanner.

Today, there are more than 40 licensed platforms.

Industry estimates say that retail investors now put about Rs 1,500-2,000 crore a month into corporate bonds. A year ago, that figure was about Rs 300 crore a month.

But here’s the thing: investing in bonds isn’t easy. You need to understand terms like liquidity, tenor, credit rating.

On top of that, each platform runs its own shop. So the same bond, same tenor, can show you one yield on one platform and another on the other.

So what’s going on in India’s corporate bond market? And do retail investors know what they’re getting into?

Kudrat (Host): My name is Kudrat Wadhwa and you’re listening to The Signal Brief.

You’re listening to our Friday episode, where we tell stories about how Indians live, work and spend.

In today’s episode: the rise of retail bond investing and the risks hiding behind the returns.

Kudrat (Host): Benny, a former business journalist, told me he knew very little about corporate bonds when he started investing in them about a year ago.

Benny: I only mainly knew about government bonds, which wasn't actually yielding much. So I never thought about, uh, investing in government bonds as such. Uh, so when I saw something like investing in bonds that are, uh, brought about by corporates which give a high return, so I thought, "Why not, uh, take a chance?" Because anyways, I am always looking at diversifying, so this is a diversification thing.

Kudrat (Host): Like Benny, most people know bonds as something the government issues, if they know about bonds at all.

The basic idea is pretty simple.

When the government needs to borrow money, it can issue government bonds. You lend the government money, and in return, it pays you interest and gives your money back at the end of a fixed period.

Companies can do the same thing.

Instead of borrowing only from banks, a company can raise money by issuing bonds to investors. You lend the company money, it pays you interest, and then returns your principal when the bond matures.

Corporate bonds typically offer a higher interest rate than government bonds–since the government is considered the least likely to default and so, safer.

So why would a company want to borrow from retail investors?

Here’s Ashish, co-founder of Capital Stack, a Chennai investment bank that helps companies raise debt from banks, institutions and retail investors.

Ashish: I mean, from a, a, a good liability management or a fundraising strategy is always, it's, it's good to kind of diversify. So while banks, uh, institutional investors will continue to kind of finance them, this creates a newer pool of capital which they can tap into.

So it's, it's a diversification strategy to diversify.

A lot of, uh, issuers see this as a strategic play, right? So companies who are looking to hit the equity market, uh, start with this to create some public awareness about their brand. So people see that, see that this... They've seen this company on platforms, so the brand recognition when they go out and, and do the equity IPO, uh, kind of that, that is also a strategy which, which a lot of the issuers use.

Kudrat (Host): Companies aren’t alone in wanting this–even the regulator, SEBI, wants India’s bond markets to deepen.

For years, India’s corporate bond market was dominated by banks and large institutional investors.

Retail investors had far fewer ways to participate.

Then, SEBI stepped in in 2022 and created a formal regulatory framework for these platforms, known as Online Bond Platform Providers, or OBPPs.

The idea was to bring these platforms under regulatory oversight and make it easier for retail investors to access the bond market.

The new rules required these platforms to register as stock brokers in the debt segment of a stock exchange.

SEBI also clarified what kinds of securities these platforms could offer and requirements around investor protection and disclosures.

So, the market became easier to access.

Platforms like Wint Wealth and Stable Money started putting corporate bonds in front of retail investors, on an app, with the returns displayed upfront.

From the perspective of retail investors, corporate bonds can look like a sweet spot.

You get a fixed return. You don't have to deal with the daily ups and downs of the stock market. And the returns can be higher than a fixed deposit.

Nishchay Nath, founder of bond aggregator platform Bondscanner, says that his platform and many others accept investments as low as 1,000 rupees.

Though the average ticket size is higher.

Nishchay: In new users, we've seen that, uh, uh, the average ticket size is generally around Rs 50,000 where they start investing on the platform.

Uh, but the average portfolio in the first month is around two and a half lakhs, right? So we have seen that people are investing about two and a half lakhs in the first month of signing up on the platform. And when we double-clicked on that, right, we found that, uh, people discover bonds as a product when they have some form of liquidity.

Let's say, for example, if an FD matured for you, uh, let's say a five lakh rupee FD matured, you start looking for, "Hey, can I earn something better? Do I reinvest it or do I, uh, uh... can I do something else with it?" And they find our platform or our product, right?

And then they find our platform. And they kind of use two, three platforms to kind of diversify.

Kudrat (Host): Once investors gain more trust, learn the process, they begin investing more money.

Nishchay: So I think we've seen that while average ticket size is about Rs 50,000, the first month portfolio is around two and a half lakhs, which grows to about six lakhs in, like, three to four months of them signing up on the platform.

Kudrat (Host): Shashank, the MBA professor, has gotten so comfortable that he described corporate bonds as “risk-free” to me.

Shashank: Even in the Indian stock market was volatile due to that. So I thought to keep some money in, uh, like the risk-free instrument, wherein case of emergency I can use that. So that is the reason, actually.

Kudrat (from clip): Okay. So you basically see bonds as being risk-free?

Shashank: See, SEBI is too strict about this bond regulation and all because end of the day it is a debt, it is a loan when the companies are raising from the retail investor. So SEBI is too strict about that. But while I'm investing in AAA rating or AA rating or the A rating companies, the quality and asset quality of the company is good. So it is... I- it's not like 100% risk-free. There are possibility of, uh, you know, uh, default risk. But as of now, it never happened with me, and I believe, uh, AAA to A rating companies are the good companies. So we can invest over there, and it is almost risk-free.

Kudrat (Host): Shashank is referring to something called a credit rating.

A credit rating is an assessment of how likely a company is to repay its debt.

AAA is the highest rating on the scale used by Indian rating agencies. Lower ratings mean investors are taking on more credit risk.

Understanding credit ratings is helpful, but it’s not exactly a guarantee that a company will pay you back.

India has seen some pretty stark examples of this.

Infrastructure lender IL&FS defaulted in 2018, despite having carried top-grade ratings shortly before its collapse. And DHFL, one of India's biggest housing finance companies, went from AAA-rated to default within a year.

So when Shashank tells me that AAA to A-rated bonds are "almost risk-free", there's an important distinction here.

A rating is an assessment of how likely a company is to repay its debt. It isn't a promise.

And Shashank himself had already started moving beyond those top ratings.

He told me he'd recently invested in a BBB-rated bond that offered a yield of 11.75%.

Shashank: I took risk because, uh, my friends also, like, they had invested in that. Three, three of my friends, they had already invested, like almost, uh, one year ago. I invested recently, like three months ago, three to four months ago. So my friend's reference actually, uh, uh, motivated me to invest in that.

Kudrat (Host): Tenor is how long your money is tied up in the bond.

And liquidity is how easily you can sell that bond if you need your money before it matures.

This isn’t just a theoretical risk.

In 2020, Franklin Templeton wound up six of its debt schemes after severe market illiquidity and rising redemptions left the schemes unable to generate enough liquidity to meet redemption demands.

It was a reminder that even when investments haven't all defaulted, investors can still have trouble getting their money out when they need it.

So liquidity is crucial.

Kudrat (Host): So let's say you're an investor who wants to explore bonds.

You've learned the jargon: credit rating, tenor, liquidity.

But there's another question: where do you buy the bond?

Should you just pick the first AAA-rated bond you see on the first platform you open?

Suresh Darak, founder of Fixed Alpha, a site that lets investors compare bonds listed on the NSE and BSE, says no

Suresh: Whenever they are buying bonds from any platform, especially the online bond platform providers, everybody is selling bonds at a different price. So you should check all the platforms before investing because, you know, the same bonds may be available at different rate at different platforms, right?

Because the broker is the seller and, uh, the client is a buyer. So, you know, if you know that some platform is selling bond at, at, let's say, twelve percent, and the same bond is sold by some other player at twelve and a half percent, it means that broker, because it is his own inventory, so that broker, uh, you know, uh, taking higher margin from you. So that is the first thing.

Kudrat (Host): I tried this myself.

I picked one corporate bond–Satin Finserv–and looked for it across different platforms.

On Bondscanner, the yield was 11.60%. On Wint, it said 11.75%. On StableBonds, it was 11.40%. The rating everywhere was the same: A-.

Some investors may find the differences confusing, but Shashank told me that he doesn’t mind the different yield rates.

Shashank: While we book a cab, so people has this habit to compare on Uber, Ola or InDrive. Like the end goal is what? I have to reach at particular destination. Similarly, my end goal is what? To invest in a corporate bond and all these companies, the broking houses, they are the mediators. So from wherever you are buying, that SEBI is the main regulator and the company. These are just the mediators. So you can choose any app or any, uh, broking houses to invest in that. We should compare before actually investing.

Kudrat (Host): So making sure you do your research, comparing different platforms, matters.

Suresh adds another thing: what you see on one platform may not be the full universe of bonds available to you.

Suresh: The capital market segment of the equity broker where you can buy, sell bonds just like equities. Always go and check that segment. You are going to get best bonds because, uh, if any broker is offering you fifteen, twenty or fifty bonds or a hundred bonds, there are eleven thousand bonds available in the market.

So if they are offering you limited inventory, it means they are offering only the inventory which they have, where they can make money. If they are not offering you the entire universe, which is possible for them to offer, so you can be more careful because, you know, uh, there may be better opportunities to earn better returns at a better rate.

Kudrat (Host): So, how does a retail investor figure out everything that’s out there?

Right now, there isn't a simple answer.

And that's something the industry itself says needs to change.

Here’s Nishchay of Bondscanner.

Nishchay: Transparency and having the best rates out there is going to definitely be a direction in which this industry has to head into.

And the regulator is also making a good amount of effort into how do we make this space much more transparent, right?

Let's say how in equity you have the order book available.

So you have, let's say your stock is at one zero six, you also have it at one zero five point nine, and it pi- and it sells very fast. I think that amount of depth in the bond market is still not existing on the retail side. So once the order depth is built, for sure we will have massive amounts of liqui- mass amounts of transparency out here.

Kudrat (Host): So, the bond market is getting easier to access.

That's good news for companies looking for new sources of capital, and for investors like Shashank and Benny who want to look beyond stocks and fixed deposits.

Open an app, tap a few buttons and voila, you’re now a corporate bond investor.

But access is only one part of the equation.

Investors also need to be able to understand the risk they're taking, compare prices across platforms, and know what else is available to them.

Right now, buying a bond is as easy as opening an app and tapping a few buttons.

But, figuring out whether you're getting a good deal is still a little harder.

Outro: That's all for today. You just heard The Signal Brief, your once-a-week look at the stories shaping how Indians live, work and spend.

The Core produces The Signal Brief. Follow us wherever you get your favourite podcasts.

To check out the rest of our work, go to www.thecore.in.

If you have feedback, we'd love to hear from you. Write to us at feedback@thecore.in or you can write to me personally at kudrat@thecore.in.

Thank you for listening!