Debt mutual funds remain the preferred route for investing in bonds and debentures—and for good reason. Professional fund management, diversification and liquidity have made them the default choice for most investors.
However, investing directly in bonds, without the mutual fund wrapper, is also an option. While this route has always existed, recent regulatory and market developments have made it far more accessible than before.
Market access
To understand why, it helps to look at how corporate bonds are issued.
Most corporate bonds are issued through private placements rather than public issues. This means they are not widely marketed to retail investors at the time of issuance but are instead placed with institutional and high-net-worth investors.
The face value of these bonds has historically been a key barrier. Earlier, privately placed corporate bonds often carried a face value of ₹10 lakh. Since bonds trade in multiples of their face value, investors needed substantial capital even to buy a single bond.
Sebi has since reduced the minimum face value for privately placed debt securities to ₹10,000. This is a significant change. It lowers the minimum transaction size in the secondary market and makes smaller investments in individual bonds practically feasible.
Alongside this regulatory change, the supporting market infrastructure has also evolved. Bond houses now facilitate direct bond investments by offering curated baskets of securities. Online Bond Platform Providers (OBPPs) have also emerged, enabling investors to access bonds through digital platforms.
Together, the lower face value and these investment platforms now make it possible to build a diversified bond portfolio without requiring a large investment amount.
Yield opportunity
There is another important development.
Corporate balance sheets are, in general, healthier than they were a decade ago. Leverage has moderated and debt-servicing ability has improved across many sectors. This has created opportunities beyond only the highest-rated AAA issuers.
Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS) have long invested in high-yield, investment-grade bonds rated below AAA to capture additional yield. However, these products typically require minimum investment amounts that are beyond the reach of most retail investors.
Through bond houses and OBPPs, investors can now construct their own basket of investment-grade bonds with similar yield characteristics at a fraction of those minimum ticket sizes.
Choosing wisely
This leads to the key question: should investors choose debt mutual funds or build their own bond portfolio?
The answer is not necessarily one or the other.
If preserving portfolio credit quality and maintaining liquidity are your priorities, debt mutual funds remain the better choice. Professionally managed debt funds offer diversification, active monitoring and easy redemption whenever funds are required.
On the other hand, investors with a longer investment horizon who are comfortable holding bonds until maturity may benefit from constructing their own portfolio of investment-grade bonds rated below AAA.
The additional yield over AAA securities—and over what conservative debt mutual funds typically offer—can be meaningful.
Direct bond investing also gives investors greater visibility over their portfolio. They know exactly which securities they own, the coupon they will receive and when each bond will mature.
However, investors taking this route must be diligent about assessing credit quality. If the intention is to hold bonds until maturity, limited secondary market liquidity becomes far less of a concern.
Finding balance
Ultimately, both approaches are legitimate, practical and increasingly accessible.
The choice depends on an investor's comfort with credit assessment and the trade-off they are willing to make between higher yield and greater liquidity.
As India's bond market becomes more accessible and transparent, investors have more options than ever before. Rather than choosing one route simply because it is fashionable, investors should understand the features, appreciate the risks and select the approach that best aligns with their investment objectives, risk appetite and liquidity needs.
Joydeep Sen is a corporate trainer (financial markets) and author.