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Business News/ Money / Personal Finance/  Investors turn to AIFs and fintechs for high yield debt

Investors turn to AIFs and fintechs for high yield debt

Understand the risk factors before investing in offerings from fintech platforms and AIFs

Graphic: Paras Jain/MintPremium
Graphic: Paras Jain/Mint

A prolonged compression in interest rates since the pandemic began in April 2020 has left investors in a difficult position. Fixed deposit (FD) rates and yields on most debt mutual funds are in the 3-5% range, even as the Reserve Bank of India has forecasted CPI (consumer price index) inflation at 5.1%. Equity has provided double-digit returns, but markets look richly valued and are subject to a high level of volatility.

Three-four years ago, mutual funds were riding high in this space, offering hefty yields by taking on credit risk. However, this bet unravelled strongly after the wave of defaults following the IL&FS crisis in September 2018, culminating in the freezing of six Franklin Templeton debt funds in April 2020.

The open-ended structure of mutual funds left them vulnerable to bouts of panic about risky debt. Over the past two years, the Securities and Exchange Board of India (Sebi) has tightened regulations for mutual funds in this space, and investors as a whole have reduced allocations to credit-risk funds.

The credit-risk category has seen assets drop from 79,643 crore in April 2019 to 25,385 crore in April 2021. However, the need for high-yield credit-risk funds hasn’t gone away. Instead, fintech platforms and alternative inves-tment funds (AIFs) have stepped in.

Wint Wealth, a fintech platform that allows investors to buy high-yield debt, was launched in January. Its early investors include Nithin Kamath of Zerodha and Kunal Shah of Cred.

The platform allows investors to buy debt paper for ticket sizes as low as 10,000 with yields of 9-11%. It started with market-linked debentures (MLDs) because capital gains on listed MLDs are taxed at 10% after a holding period of one year. Wint Wealth partners with NBFCs to buy their MLDs in the primary market and then sells them to investors in the secondary market, earning a spread of about 2%.

However, Wint Wealth is now increasingly listing ordinary debt with a monthly payout of interest due to demand from investors. The platform focuses on covered bonds or bonds that are backed up by some security in the AA to BBB space.

“Our first NBFC partner was IIFL and this was followed by Kanakadurga Finance and Kogta Financial whose bonds were rated A and AA, respectively," said Ajinkya Kulkarni, co-founder, Wint Wealth. The latest listing has been of U Gro Capital. “We don’t go solely by credit ratings because we think there are gaps in the system. We do our own due diligence."

So far, Wint Wealth has issued around 50 crore of debt through its platform, Kulkarni said, and counts an investor base of 5,000. Larger wealth management firms also offer MLDs, but some have a stronger equity component (returns linked to the stock market as well as a fixed component).

“Our MLDs have a strong and genuine market linkage. So, for example, if the Nifty gives no return for the next three years, you will only get your capital back. That said, the debt yield we give is 7.5%. We issue around 300 crore of MLDs per month," said Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management.

Anand Rathi only issues MLDs from its own NBFC in order to minimize credit risk, he said.

TradeCred, another platform, offers investors yields from bill discounting. Bill discounting is a process in which suppliers of large corporations who cannot wait for their money sell their claims to investors in return for a small haircut. This, in turn, becomes a source of returns for the investors.

“Suppliers to big companies like ITC often cannot wait to be paid. So, they are willing to sell their invoices at a discount to investors. Investors earn some returns by purchasing such invoices; currently 12-13% annualized on our portal. The tenor is 30-90 days. We carefully select companies from a pool of A-rated corporates and then investors must choose from within our listings. A minimum of 50,000 applies to each investment," said Kunal Tekwani, co-founder, TradeCred.

TradeCred has not seen a single bill dispute so far in the three years of its existence, he said. But getting a steady supply of high-quality bills is becoming increasingly difficult due to heavy demand. The returns on bill discounting are considered as income from other sources and taxed at slab rate.

For high-net-worth individuals (HNIs), AIFs offer a more structured vehicle of getting into high-yield debt. AIFs have a minimum ticket size of 1 crore. Vivriti Asset Management, a two-year-old debt fund manager that has raised 1,500 crore till date, is launching a series of AIFs in the debt space targeting paper rated AA and below.

The new funds are aimed at offering post-tax yields of 6-10% for an investor in the 40% tax bracket, said Soumendra Ghosh, chief investment officer, Vivriti. AIFs have pass-through taxation, which means that the funds are targeting pre-tax yields of 10-16%.

The default rate on debt raised via its curated platform is just 0.17% over the past four years; a period that includes demonetization, IL&FS collapse, GST rollout and two covid waves.

“There is a gap between the 3-6% that mutual funds give and high-yield funds indicating 16%+ yields. We are targeting that middle range. 70-80% of investor money flows into AA+ and above space and yields shoot up dramatically for A and BBB. This extra reward is much higher than the delta increase in risk/default rate," said Vineet Sukumar, founder and chief executive officer, Vivriti Asset Management.

In another instance of AIFs making forays into this space, Sundaram Alternates (SA), the alternative asset manager owned by Sundaram Asset Management Co, has announced the launch of its third real estate debt fund. SA currently manages two real estate funds.

With a gross portfolio IRR around 19%, SA’s High-Yield Secured Debt Fund I has repaid approximately 61% of capital in less than three years since final closing, a company release said.

Even as opportunities arise in the high-yield space, the risks have not gone away. “Investors should note that these are high-risk instruments and understanding these is important," Kulkarni said, referring to the debt products listed on Wint Wealth.

Those who piled into real estate debt in the last cycle have seen severe losses.

“I don’t see debt as a place to generate returns; equity fulfils that need. However, if you do want higher returns in debt, look at the regulated organized sector first, like credit-risk funds. If you are looking at a fintech platform, ascertain its pedigree and brand. Go for the reputed ones. Also look at the rating of the underlying debt. This needs to align with your risk appetite," said Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors.

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Neil Borate
I head the personal finance team at Mint. I have been writing about personal finance for the past 8 years after finishing two degrees in law and economics respectively. I do what I do, to help the ordinary Indian saver and investor.
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Published: 11 Jun 2021, 01:34 AM IST
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