Why Are Millennials Choosing Corporate Bonds
Owing to the rapid development in technology, the world has experienced pacing evolution in almost all aspects of all, and investment aspirations are no exception. They are becoming more specific, and to cater to such aspirations, investment instruments are evolving. In the wake of this trend, debt securities are gaining the spotlight.
Corporate bonds are emerging to be one of the most preferred investment avenues for millennial investors. Let us dive deep into this bond market trend and explore its future prospects.
Bond Market Overview
The concept of investing in debt was less popular among retail investors a few decades ago. However, the gradual shift in investment attitude paved a path for debt instruments. Bonds have evolved to be one of the most attractive instruments due to their fixed interest income and market exposure through a variety of bond options. The growth was evident when the global bond market was valued at $133 trillion in early 20241. It is higher than the global equity market.
The tale of the Indian bond market echoes this growth. It is valued at $2.6 trillion in a similar period. Due to the vast population, investment objectives are diverse in India. The variety of bond types, such as corporate bonds, government bonds, convertible bonds, and many more, has the potential to cater to these objectives.
Key Drivers Of The Bond Market
Similar to the global levels, the Indian bond market has a higher value than the equities market. This achievement is a product of the combined efforts of several factors in the country:
- The Indian economy is marching with positive Gross Domestic Product (GDP) growth post covid period. Despite geo-political tensions, in FY 2023-24, this growth was 8.2%2, and future projects stand strong at 7%. A positive investment environment in the country can be a key component of this growth.
- In recent years, policies from government and regulatory bodies, like regulating credit rating norms and reducing bond face value, have been aiming to instil responsible investment behaviour among the investors, which has also driven the policy reforms.
- Due to digitalisation, people are becoming aware of varied investment avenues to suit their needs. Previously, debt investment was perceived to be complex. However, the regulation of Online Bond Platform Providers (OBPP) for debt investments has tried removing this hurdle and platforms like Grip are playing a significant role in catalysing it.
Future Of The Indian Bond Market
The Indian bond market has high potential, and the above-given growth drivers may keep contributing to this growth. However, some recent developments by the market regulators can potentially multiply this growth in the upcoming years.
New SEBI Regulations For Bond Investing
One of the key hurdles in the growth of Indian bond markets was its ticket size, which was INR 1 lakh. However, in recent years, its growth and the growing inclination of investors towards bonds have caught the limelight. In line with this, SEBI reduced the ticket size (face value) of the bonds to INR 10,000 in July 2024.
SEBI also recently introduced a ‘Liquidity Window’ Facility for debt securities, which empowers issuers to offer a put option. This essentially means that investors now would be able to sell their bonds back to the issuer before the maturity date. This will work to enhance the liquidity and flexibility of corporate bonds and encourage investment in this fixed-income instrument.
Global Inclusions
Indian bonds got special global recognition through their inclusion in the ‘JPMorgan Government Bond Index - Emerging Markets’. The inclusion has brightened up the prospects of the bond market in India. Due to this recognition, the bond market is expected to gain a $25-30 billion inflow up to April 2025.
Besides JPMorgan, Bloomberg and FTSE Russell indices are also set to include Indian bonds in 2025.
However, along with these reforms, a significant trend is observed in the bond market, specifically for corporate bonds. The millennials, who constitute a key part of the working class, are inclined towards them. Let us discover more.
Millennials Investing In Corporate Bonds
As the generations shift, their perspective, nature, aspirations and attitudes change. People born between 1981 and 1996 are considered millennials. In 2024, they will be around 28-43 years old. Therefore, these millennials constitute a significant part of the working population.
These millennials are shifting from traditional instruments like bank fixed deposits to modern instruments of equity and debt nature. In a recent study by us, it was discovered that 63% of the millennial investors on their platform have invested in corporate bonds. These facts indicate positive momentum for projected growth of INR 53 lakh crore till 2030 in the corporate bonds market.
The following aspects may have led to the inclination of millennials towards corporate bonds in India:
- The risk-adjusted perspective of millennials makes bond investments suitable.
- Their digital exposure and preference for autonomy in the investment process can be facilitated by the OBPP regulation for debt markets.
- Innovation and experimentation are valued by millennials.
Moreover, the recent regulatory changes, like a reduction in the bond ticket size, may increase their accessibility in the upcoming days.
Benefits Of Investing In Corporate Bonds
Prospective investors willing to invest in corporate bonds can benefit mainly in these three ways:
1. Income Generation
Debt instruments like corporate bonds offer an interest income at regular intervals. Investors can withdraw this interest or reinvest to earn compounded returns. Corporate bonds are a prominent instrument used by businesses to procure debt money from the public. Therefore, with market exposure, a profitable business may help earn potential appreciation in the invested capital.
2. Security Of Credit Rating
Corporate bonds are rated by the credit rating agencies. This rating is an amalgamation of different aspects like operational efficiency, debt repayment capacity, business credibility, credit default risk, market risk, and more. It saves investors time and effort to have a holistic view of investment quality. In India, these credit ratings are provided by agencies like CRISIL, ICRA, and Care Edge.
3. Diversification
Investors can unleash the benefits of spreading risk and returns throughout the portfolio with the help of diversification. Having a suitable mix of equity, debt and other investment instruments is desired. Corporate bonds are a unique way to access the businesses, their performance benefit and interest income.
Way Forward: Challenges And Considerations
As per industry experts, foreign investment inflow in the bond market may observe a $30-$40 billion annual surge in the next five years. Moreover, the bond market in India is expected to witness many other transforming events in the upcoming period. However, there are some hurdles that should be managed to smoothen the growth.
- Regulatory norms may need revisions to make suitable considerations for upcoming foreign investors inflow or retail participation in this market.
- There is a need for a robust credit rating infrastructure that gauges the developments in the market.
Conclusions
The Indian bond market may enjoy momentum in upcoming years, and corporate bonds can contribute significantly. Moreover, the growing inclination of millennials towards investing in corporate bonds can drive this growth. This transformation can be catalysed by managing some impending challenges.
You can also benefit from this transformation! Just sign up to Grip and explore 30+ unique options for investing in corporate bonds.
Frequently Asked Questions About Corporate Bonds
1. What is the risk of corporate bonds?Corporate bonds have many benefits which may align with modern investment goals. However, being a debt instrument, it is inherently accompanied by credit default risk.
2. Is investing in corporate bonds a good option?
Yes, investment in the corporate bonds can be a potential option if it aligns with the financial goal, risk appetite and capacity of the investors. It offers interest income, market exposure and diversification in the form of debt instruments. However, investors should also consider the risks associated with investing.
3. How can beginners invest in corporate bonds?
In modern times, the investment process is simplified in many ways. Investors can also invest in corporate bonds with online platforms like Grip Invest, which offers 30+ corporate bond options and seamless investment services.
References
1. WEF, Accessed from https://www.weforum.org/agenda/2023/04/ranked-the-largest-bond-markets-in-the-world/.
2. World Bank Group, Accessed from https://www.worldbank.org/en/news/press-release/2024/09/03/india-s-economy-to-remain-strong-despite-subdued-global-growth.
Want to stay at the top of your finances?
Join the community of 4 lakh+ investors and learn more about Grip Invest, the latest financial knick-knacks, and shenanigans in the world of investing.
Happy Investing!
Disclaimer - Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading.
This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for consequences of any actions taken based on the information provided. For more details, please visit www.gripinvest.in
Registered Address - 106, II F, New Asiatic Building, H Block, Connaught Place, New Delhi 110001
