 "Retail debt: Still miles to go")
Retail investors are becoming more debt-savvy and willing to go beyond the fixed deposit (FD) route. For example, retail investors in debt mutual funds (MFs) have almost doubled from 3.4 million to 6.4 million folios (one folio represents one investor's account) in the five years to March 2015. The total assets under management doubled from Rs 19,641 crore to Rs 40,790 crore in the same period.
There are other signals. While those in the sector say retail investors' share in bank deposits continues to be high and at 70-75 per cent of banks' term deposits, they add there has been more participation from retail investors in tax-free and public issue of bonds. In the financial year ending March 31, 2014, tax-free bonds worth Rs 50,000 crore hit the market, all of which were a huge success. The issuers included Rural Electrification Corporation, Indian Railway Finance Corporation and National Highways Authority of India. Though the scorecard was nil in FY15, the National Highways Authority of India and IRFC have announced Rs 30,000 crore of tax-free bonds for FY16. (Global bond market share: India missing)
Even the Reserve Bank of India feels it could be a good time to introduce retail investors to government securities (g-secs) directly. In its first bi-monthly monetary policy statement on April 7, it announced measures to make g-secs more accessible. The proposed moves include a web-based solution for all mid-segment and retail investors who have gilt accounts to participate in the g-sec market and providing them direct access to both primary and secondary market platforms without any intermediary. For this, alternate channels of distribution would be created.
However, retail participation in debt MFs still forms a minuscule part of the total assets under management. Of the total debt AUM of Rs 6.94 lakh crore in March 2015, retail investors contribute only Rs 40,000 crore or 5.76 per cent.
Too early, too soon?
Obviously, market players aren't sure whether retail investors are savvy enough to deal with g-secs just yet. Fund managers believe it might be too much, too soon. "Procedurally, investments in MFs are much simpler than investments in g-secs. Additionally, debt MFs offer the retail investor diversification benefits to lower risk, along with professional fund management. This is an important consideration for non-sophisticated investors," said Brijen Puri, managing director and head of markets at JPMorgan, adding investments in government bonds require a Subsidiary General Ledger (SGL) account, which entails a more complex operating procedure.
In addition, the tax component has to be taken into account. "When investing in fixed income, bonds and bank fixed deposits aren't so tax-efficient," said Ananth Narayan, regional head- financial markets, South Asia, Standard Chartered Bank.
There are more attractive, tax-efficient and simpler products competing for retail investors' money. "Retail investors utilise their investment limits in public provident fund (PPF), national savings certificates (NSE) etc and then come to MFs. Investors do not realise that if they enter debt funds at the right time, they can end up making more money compared with those instruments," said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.
It's not that investing in mutual fund is easy. Investors need to do some research on the record of the fund house and the manager.
Fund managers believe with increased awareness and initiatives from the regulators to educate investors, the share of retail will increase. There is a lacunae in marketing as well. "Not much of marketing has been done for investments in government securities and this is particularly the case with semi-urban and rural areas. The government should be doing this because they are the issuers. The option is to compensate banks and primary dealers (PDs) by giving some incentives to do the marketing for government bonds," said N S Venkatesh, executive director and head of treasury at IDBI Bank.
A top public sector bank executive said his experience with hawking government bonds to retail customers has not been very satisfactory, as retail investors give priority to liquidity, which is low in a shallow debt market. Market making - giving a route for exit - on a sustained basis will be necessary to get the retail segment on board.
A few experts suggest establishment of a convergence of benchmarks used to track interest rates in the country across the real sector and the financial sector. This would eventually lead to retail participation in other debt instruments, too. "The real sector looks at rates like bank mortgage and deposit rates, bank base rates, etc, while the financial sector looks at benchmarks such as RBI liquidity adjustment facility (LAF) repo rate, Mumbai interbank offered rate (MIBOR), government bonds etc. Due to this dichotomy, there is very little incentive for the real sector, including retail, to look at financial sector instruments such as interest rate futures. For proper transmission and convergence across all sectors, deposit rates and lending rates should be in some way linked to financial sector benchmarks," said Ananth Narayan.
(With inputs from Abhijit Lele & M Saraswathy)
There are other signals. While those in the sector say retail investors' share in bank deposits continues to be high and at 70-75 per cent of banks' term deposits, they add there has been more participation from retail investors in tax-free and public issue of bonds. In the financial year ending March 31, 2014, tax-free bonds worth Rs 50,000 crore hit the market, all of which were a huge success. The issuers included Rural Electrification Corporation, Indian Railway Finance Corporation and National Highways Authority of India. Though the scorecard was nil in FY15, the National Highways Authority of India and IRFC have announced Rs 30,000 crore of tax-free bonds for FY16. (Global bond market share: India missing)
Even the Reserve Bank of India feels it could be a good time to introduce retail investors to government securities (g-secs) directly. In its first bi-monthly monetary policy statement on April 7, it announced measures to make g-secs more accessible. The proposed moves include a web-based solution for all mid-segment and retail investors who have gilt accounts to participate in the g-sec market and providing them direct access to both primary and secondary market platforms without any intermediary. For this, alternate channels of distribution would be created.
However, retail participation in debt MFs still forms a minuscule part of the total assets under management. Of the total debt AUM of Rs 6.94 lakh crore in March 2015, retail investors contribute only Rs 40,000 crore or 5.76 per cent.
Too early, too soon?
Obviously, market players aren't sure whether retail investors are savvy enough to deal with g-secs just yet. Fund managers believe it might be too much, too soon. "Procedurally, investments in MFs are much simpler than investments in g-secs. Additionally, debt MFs offer the retail investor diversification benefits to lower risk, along with professional fund management. This is an important consideration for non-sophisticated investors," said Brijen Puri, managing director and head of markets at JPMorgan, adding investments in government bonds require a Subsidiary General Ledger (SGL) account, which entails a more complex operating procedure.
In addition, the tax component has to be taken into account. "When investing in fixed income, bonds and bank fixed deposits aren't so tax-efficient," said Ananth Narayan, regional head- financial markets, South Asia, Standard Chartered Bank.
There are more attractive, tax-efficient and simpler products competing for retail investors' money. "Retail investors utilise their investment limits in public provident fund (PPF), national savings certificates (NSE) etc and then come to MFs. Investors do not realise that if they enter debt funds at the right time, they can end up making more money compared with those instruments," said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.
It's not that investing in mutual fund is easy. Investors need to do some research on the record of the fund house and the manager.
Fund managers believe with increased awareness and initiatives from the regulators to educate investors, the share of retail will increase. There is a lacunae in marketing as well. "Not much of marketing has been done for investments in government securities and this is particularly the case with semi-urban and rural areas. The government should be doing this because they are the issuers. The option is to compensate banks and primary dealers (PDs) by giving some incentives to do the marketing for government bonds," said N S Venkatesh, executive director and head of treasury at IDBI Bank.
A top public sector bank executive said his experience with hawking government bonds to retail customers has not been very satisfactory, as retail investors give priority to liquidity, which is low in a shallow debt market. Market making - giving a route for exit - on a sustained basis will be necessary to get the retail segment on board.
A few experts suggest establishment of a convergence of benchmarks used to track interest rates in the country across the real sector and the financial sector. This would eventually lead to retail participation in other debt instruments, too. "The real sector looks at rates like bank mortgage and deposit rates, bank base rates, etc, while the financial sector looks at benchmarks such as RBI liquidity adjustment facility (LAF) repo rate, Mumbai interbank offered rate (MIBOR), government bonds etc. Due to this dichotomy, there is very little incentive for the real sector, including retail, to look at financial sector instruments such as interest rate futures. For proper transmission and convergence across all sectors, deposit rates and lending rates should be in some way linked to financial sector benchmarks," said Ananth Narayan.
(With inputs from Abhijit Lele & M Saraswathy)