A basket of bonds for your debt portfolio!
As financial products continue to evolve, the basket of products keeps changing. That being said, debt mutual funds have long been favored by retail investors, mainly because of their tax advantages. Also, the fact that debt bears less risk has always made it a secure investment option.
Investors, however, have been searching for their next best option since Budget 2023. As well as this, SEBI, the market regulator, was looking to increase retail investor participation in corporate bonds. As part of its efforts to meet this objective, SEBI in June allowed online Bond Platform Providers (OBPPs) to provide further SDIs (Securitised Debt Instruments). Investors can now invest in multiple assets, thereby diversifying their risks!
Let's take a deeper look at the SDIs!
What are SDIs?
Financial instruments known as SDIs indicate ownership in a group of underlying assets, which may include leases, loans, or receivables. To make these assets into tradable securities that can be purchased and sold on the financial markets, they are usually bundled and securitized. Platforms that use the SDI route adhere to the rules and regulations set forth by the Securities and Exchange Board of India (Sebi). However, depending on the underlying securities, it still carries credit, liquidity, and fraud risks.
For instance, Wint Wealth has introduced a new product that allows investors to invest as little as Rs 1 lakh and functions similarly to a basket of bonds with six to eight underlying bonds.
Due to the concentration risk in a single unit, many investors find it difficult to invest in bonds since the ticket size for privately placed bonds is Rs 1 lakh (for every single unit). However, by allowing investors to diversify their bond portfolios among numerous bonds, the development of SDIs provides a solution.
In a similar vein, Grip's LoanX provides an SDI product that lets you invest in a diverse pool of loans given to people, companies, or other organizations. A Non-Banking financial company (NBFC) that originated these loans is providing direct access to the yields produced by these loan portfolios.
The structurization of SDIs!
Investment Opportunities In India
Securitized debt instruments (SDIs) have become a popular alternative investment choice in the Indian financial scene. This allows you to diversify your portfolio beyond traditional stocks and bonds. One of the most prominent types of SDIs is the Mortgage-Backed securities (MBS) investment option. In this case, mortgages are packaged into securities and sold to investors, who receive payment returns in the form of interest on houses. This perspective provides access to a range of options beyond conventional assets.
According to research, loan securitization volumes increased by over 50% in the final quarter of FY 22–23, amounting to over INR 50,000 crore. Loan assets were securitized for a total of INR 1.35 lakh crore during the previous fiscal year. This amount was approximately INR 0.90 lakh crore in 2021.
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What are the potential risks SDIs carry?
The possibility that a borrower won't be able to pay back a debt is known as default risk. This may occur for a number of reasons, including death, illness, or loss of employment. The lender might not be able to recoup the entire loan amount in the event of a borrower default. When making lending decisions, lenders must take default risk into account. Prior to granting a loan, lenders will evaluate the borrower's creditworthiness. Borrowers who pose a greater risk of default may also be subject to a higher interest rate.
The value of your investment may decrease if the market for these isn't performing adequately.
Credit rating agencies assess the risk of the loans they examine, but errors, incomplete data, or the issuer's wish to reduce financing costs might cause bad loans to be confused with excellent loans. The net NPA data is useful to investors, but it simply presents the current situation and ignores the possibility of failure in the future. Thus, investors in securitized debt products should consider the possibility of defaulting on their loans and be aware of the limitations associated with the credit rating procedure.
Borrowers may be able to pay back their loans earlier when using securitized debt. This may have an impact on the expected returns for investors.
Liquidity refers to the ease with which an item can be converted into cash. If you need your money back right now, it can be difficult to sell some of these slices.
Disclaimer: The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose