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The Indian bond market is exploding with options. If you search on Google for “buy bonds in India”, the first hits and the last three hits are ads by bond portals! Then we have portals that exclusively sell via influencer networks and content marketing.
These bond portals have different offerings, from gilts to corporate bonds to covered bonds (refinanced debt) to peer-to-peer lending. For a simple explanation of covered bonds, see: Is there a place for high-interest rate fixed income products in a portfolio?
The offers from these portals go, “buy 9%, 10%, 12% …. bonds”. Then they claim such bonds are safe, they have done the research to protect investors. The feedback from “investors” claim that these bonds are safer than stocks and more rewarding than bank FDs.
But are such bonds (other than those offered by GOI or RBI) safe? The short answer is no. In the bond market, the risk premium is measured against sovereign bonds. Government bonds have a sovereign guarantee. Unless the country is in serious trouble, the currency is in deep trouble, or the government is bankrupt, such bonds are “safe”.
Any other bond, including state development loans, is never as safe. A bond offers a higher interest because its repaying ability is lower than that of the central government. This is ironic as we demand more interest from an already troubled entity.
In the case of state government loans, there is considerable borrowing from the central government, so defaults are rare, if not unlikely. However, in principle, interest payment can be delayed if state finances are in a crunch.
But my loan is secured with collateral. Is this not safe? No, it is not! Collateral is almost always an illiquid asset. So selling it will take time, even if we assume no other legal barriers exist. So if the borrower with collateral defaults, you will get your money back “after some time” – when no one can say. Delay = loss because time is money! Also see: Delay in EPF…
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