The Hindu Business Line : ‘Allocate to debt instruments’

For widening investor base, the scope of investment by provident/pension/gratuity funds and insurance companies in corporate bonds should be enhanced.

Mr A.K. Mittal

Retail investors should be encouraged to participate in the bond market through stock exchanges and mutual funds, argues Mr A K Mittal, MD & CEO, AK Capital Services.

Excerpts from an interview.

What are the factors that will spur the market for fixed-income products in future?

Infrastructure financing requirements are large and you cannot expect the banking sector to meet them alone. Commercial banks have managed to fill this gap, but only in a limited way. There are asset-liability mismatch issues that banks must handle. Banks already appear to have significant exposure to long-term funds. They may, therefore, not be in a position to support long-term projects in future in the way they have been able to do in recent years.

Inadequate long-term resources can, therefore, act as a constraint on India’s future growth prospects.

Several initiatives to develop the corporate bond market have been taken in recent times. For widening investor base, the scope of investment by provident/pension/gratuity funds and insurance companies in corporate bonds should be enhanced.

Retail investors should be encouraged to participate in the market through stock exchanges and mutual funds.

With the equity market moving up rapidly, do you think investors need to exit partially and increase allocation to debt?

The Answer is Yes. After the rally witnessed in equities in the last three years, leading equity research houses are suggesting that return expectation need be in the range of 15-18 per cent per annum. Against this, the debt market is offering returns in the range of 9-10 per cent.

Considering the risk reward return perspective, investors are better off by stepping up their allocation to debt market instruments.

Retail investment in debt securities is quite low. How can this segment be boosted?

Retail investors, apart from the return expectations, invariably look at ease of carrying on a transaction and liquidity, before they start investing regularly and in large numbers in a particular asset class.

The debt market has been facing liquidity issues as well as issues related to larger transaction size. A typical deal size in the debt market happens in lot size of Rs 10 lakh.

Can the scenario change?

Yes, that may happen because of four key reasons. One, returns on g-secs have increased to approx 8.4 per cent per annum currently for long tenure bonds. This is more than the comparable rate on small saving tools like post office monthly income schemes and KVP.

Two, the regulatory authorities are trying to operationalise a trading platform for debt securities, thereby imparting liquidity.

Three, equity return expectation is being scaled down.

Four, there are efforts to boost the tax-free municipal bonds market in India.

This is among the largest segments in countries like the US in terms of retail participation.

For debt players like AK Cap, where will growth come from?

We have been a focused debt market player for over a decade. Private placement of debt, which shot into prominence in the early 1990s, has grown sharply in recent years. Resource mobilisation by way of private placements increased has markedly in the past ten years. We expect the growth to sustain. This will also give us an opportunity to expand. The market has yet to see entry of new instruments like the Credit Default Swaps (CDS). It is also waiting for a vibrant derivative market, a securitisation market and a munibond market. Individually, each can become a standalone asset class.

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