“Fixed Income Deserves To Be Part of Core Portfolio” – Shyam Maheshwari

Fixed Income deserves to be part of core portfolio, says Shyam Maheshwari who gives an indepth analysis of the importance of fixed income becoming a core part of any portfolio. Generally, bank deposits, savings accounts, etc formed the base for fixed income. However, over time mutual funds with liquid plans gave better tax-adjusted returns than bank deposits shifting the preference for savers. However, direct bonds, Non-Convertible Debentures, securitised products have not gained traction in our portfolios due to a lack of investor awareness as well as risk pricing of these alternatives, Shyam Maheshwari says.

“While the mutual fund is a good way to participate in the bond markets — very similar to the mutual funds for equity markets — there should also be an opportunity to construct a dynamic portfolio based on personal preference of individual bonds. Unless there is concentrated effort from multiple angles to develop the markets, it would take much longer for the markets to develop on their own. In the US, Mike Milken of Drexel can be thanked for acceleration in the bond market development as the leveraged buyout wave swept the markets in the 80s which Milken financed by developing the “junk” bond market. Such ideas were non-existent before that”, Mr. Maheshwari highlights.

Shyam Maheshwari

In particular, given the Indian context, the following could be helpful:

· Encouraging individual participation in the bond market. This can be done by reducing the denomination of bonds, providing tax incentives and improving disclosure of issuers that would give confidence to the retail investors.

· Allowing financial institutions such as pension funds and insurance companies to invest in sub-investment grade bonds — albeit slowly. This would allow institution-level scrutiny of the credit quality of the issuer.

· Simplifying the tax deductions for the issuer without having to know the status of the holder. The onus should shift to the holder to pay their taxes other than foreign investors.

· Allowing tax deduction for leveraged buyout transactions.

As India embarks on high single-digit GDP growth over the next decade or two, it would need a well-functioning bond market alongside its relatively developed equity markets to provide the necessary financing to the industries for their growth needs in the times to come, Shyam Maheshwari asserts. Who could have imagined the level of retail participation in equity markets in the late 90s — but it has increased multi-fold making the markets more vibrant and deep. According to the financial expert, there is no reason why the same should not be applicable to bond markets. After all, fixed-income markets globally are multiple equity markets, Shyam Maheshwari concludes.