Unrated Investments: Think….And Think Again Before You Take The Plunge
Investing in financial markets can be both exciting and exhausting. Traditional fixed-income investments often come with well-established rating systems that help investors assess their risk and potential returns. However, there is another realm of investments that falls outside these conventional rating frameworks and is called Unrated Investments.
As the name suggests, these assets are not rated by any national credit agency like CRISIL, ICRA, CARE, etc which means it is harder to understand and evaluate their risk profile. Such unrated investments typically tend to have higher risk and if rated may be classified as non-investment grade. In either case, it becomes challenging for the investor to evaluate details about the investment, financial performance, and track record of returns for such unrated investments.
In this blog, we will talk about types of unrated fixed-income investments, provide a comparative analysis with rated investments, and discuss why one should prefer investing in the rated ones.
Types Of Unrated Investments
Peer-to-Peer (P2P) Lending refers to the direct grant of loans from one individual to another through online platforms which connect individual lenders with borrowers, bypassing traditional financial institutions.
Invoice discounting is a process whereby a business sells its pending invoices to get early cash against a discount to the investors.
Unrated bonds are debt securities that are not listed or traded on any recognised stock exchange.
Why Are Rated Investments Better Than Unrated Ones?
Rated investments are considered more favorable and secure compared to unrated investments due to several reasons as mentioned below:
Credibility And Independent Evaluation: Rated investments undergo a comprehensive evaluation by recognized credit rating agencies whereby they assess the creditworthiness and risk of the investments. The rating agencies analyse financials, market position, management quality, and industry trends, to assign a rating. This evaluation provides investors with a benchmark to assess the investment's risk and make informed decisions.
Established Risk Metrics: Credit ratings provide standardized risk metrics that help investors to take prudent investment decisions. Rating agencies use a consistent methodology to assign ratings, allowing investors to compare different investments and understand their relative risk levels. This enables investors to make risk-adjusted investment decisions based on their risk tolerance and investment objectives.
Greater Liquidity: Rated investments have greater liquidity compared to unrated investments. They are traded on established financial markets giving opportunities for investors to buy or sell their holdings. The presence of secondary markets enhances flexibility and allows investors to adjust their investment positions based on changing market conditions or personal circumstances.
Regulatory Compliance and Investor Protections: Rated investments adhere to regulatory requirements and provide investor protection. Regulatory bodies can enforce transparency, disclosure, and reporting standards to ensure that issuers meet certain standards and also provide timely and accurate information to investors. These regulations aim to protect investors' interests and reduce the potential for fraud or misleading practices.
The below table summarises some key differences between Rated and Unrated Investments:
| Aspects | Rated Investments | Unrated Investments |
| Credit Ratings | Credit ratings assigned by recognised agencies | No formal credit ratings |
| Evaluation | Independent evaluation of creditworthiness | Relies on the investor's own due diligence and analysis |
| Risk Assessment | Standardised risk metrics | Lack of standardised risk metrics |
| Liquidity | More liquid with established markets | Less liquid or limited secondary market |
| Investor Confidence | Perceived lower risk | Considered higher risk |
| Regulatory Compliance | Adheres to regulatory requirements and protections | Have limited regulatory oversight and protections |
| Institutional Acceptance | Widely accepted by institutional investors | Have limited acceptance by institutional investors |
| Transparency | Higher level | Limited disclosure requirements |
| Market Perception | Stable and reliable | Highly volatile |
Conclusion
Unrated investments can provide opportunities for diversification and potentially higher returns, but they come with increased risks. Investors should consider their risk tolerance, conduct thorough research, and consult with financial professionals before thinking to invest in unrated investments. Or ‘Go Beyond’ the world of traditional investments and start investing with Grip Invest which provides you with a platform to explore Alternative Investment Opportunities which are rated as well as SEBI-regulated. Sign up with Grip and start investing in these opportunities which start at INR 10,000 and explore a variety of rated fixed-income instruments with returns from 10-16%.
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Disclaimer: 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 Invest Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer-related documents carefully.
