How To Diversify Your Debt Portfolio With Bond Baskets?

KEY TAKEAWAYS

1. Debt mutual funds often offer low returns, typically between 4% and 9%, which may not beat inflation, whereas bonds, with slightly higher risk can offer better returns, around 10% to 14%.

2. Bond baskets are a curated set of bonds and other fixed-income securities, allowing investors to diversify their portfolios easily by investing in theme-based pools.

3. Baskets simplify the investment process by offering theme-based selection, diversification, convenience, and expert recommendations from SEBI-registered analysts.

4. While bond baskets offer higher returns and diversification, they may have a high ticket size and lack flexibility for customization.

5. Platforms like Grip, TheFixedIncome, and IndiaBonds offer bond baskets, providing a convenient entry point for first-time investors into the bond market.

Do you invest in debt mutual funds? If so, why? Is it because they are easy to manage, with a professional expert handling investments in various fixed-income securities like corporate bonds, treasury bills, commercial papers, and certificates of deposit?

But what about their returns? Many people don't realize that debt mutual funds have historically offered low returns, typically between 4% and 9%, which often don't even beat inflation. In contrast, bonds with slightly higher risk have been offering better returns, around 10% to 13%.

So, what's stopping you from investing in bonds? Maybe it's the hassle of researching and choosing the right bonds, which can be a time-consuming task,right?

Well, that is where the concept of basket of bonds can come to your rescue. So today, in our new article of the AltXtra series, we bring to you bond baskets. In June 2024, SEBI-registered OBPP Grip had become the first platform to introduce basket for bonds and SDIs.

If you prefer watching in video format, checkout our latest video here:

What Are Baskets?

Baskets are a curated set of bonds and other fixed income securities like SDIs, made available in a theme-based pool that can be purchased in one go. Think of it like multiple eggs put into one basket. So here, multiple bonds are put into one basket, and there can be different baskets from which you can choose as per the theme (or sectors and categories of bonds/SDIs) you prefer. This makes the otherwise complex investment decision of selecting among various bonds easier.

Some of you reading may be aware of Smallcase. Baskets are similar to that. The only difference is Smallcase is for equities whereas Baskets are for bonds.

If you are interested in knowing more about baskets, let us help you understand it.

How Does Basket Help Investors?

As we mentioned earlier, many of you who would have invested in debt mutual funds might have stayed away from bonds because of the detailed and time-taking research and undue stress that can crop up when trying to choose the right bond to invest in. That is where basket as a product steps in to address these pain points of investors, by offering investment options within the curated basket, with the following features:

• Theme based selection: You can select the theme, i.e. the sectors or categories of bonds in which you wish to invest for high-yields, such as high return basket, high credit rating basket, or ultra short tenure basket.

• Diversification: Each curated basket on platform holds multiple bonds and/or SDIs to lower your portfolio’s overall risk through diversification.

• Convenience: Just a click or two is all it takes for you to invest in the basket, thus saving your valuable time.

• Picked by SEBI-registered analyst: Also, its noteworthy that the bonds curated in basket offered by Grip are recommended and vetted by a SEBI registered research analyst, which shows that there is a lot of expertise behind the bonds recommended in each basket. This also inculcates confidence among investors regarding the quality and potential of their basket’s investments.

What Does A Basket Look Like?

Basket as a product is now being offered by a 2-3 other OBPP players as well, but for this article we have taken Grip’s example as they were the first ones to launch the concept.

To help you better understand Grip’s basket, here are some snapshots showing two curated bond baskets currently being offered on its platform.

Lets pick one of these baskets (Diversified Bond Basket with Principal Repayment at Maturity) to further deep dive into what all information Grip has put out for investors.

As we can see from this snapshot, this is a curated basket of three NBFC bonds-Oxyzo Financial, Midland Microfin and Vedika Capital. Investing in this Basket enables access to diverse sectors, such as MFI Loans, MSME, Personal Loans, and Supply Chain Loans.

Besides this breakup of the bond basket’s constituents, a detailed information about both the overall basket as well as each NBFC bond’s financial snapshot is available for investor.

It’s natural to wonder how some of the aspects around payments or tax would work in a Basket, right?. The same are answered below (click on question to see the answer)

Things We Like About Baskets

• Baskets with curated sets of bonds help investors save a lot of time and effort. This also simplifies the investment process and makes it convenient for investors without too much of a headache of researching everything themselves.

• It has the potential to offer higher returns than debt mutual funds or any other similar products in the market and still offer diversification.

• Baskets can help you get exposure to the debt of a specific sector or theme easily.

• As baskets hold multiple bonds and/or SDIs, this helps lower your investment portfolio’s overall risk through diversification.

• If we specifically talk about Grip’s basket, the bonds curated in its baskets are recommended and vetted by a SEBI registered research analyst, which shows that there is a lot of expertise and knowledge behind the bonds recommended in each basket. Also, each bond/SDI in a basket is regulated, rated and gets credited to your demat account.

Things We Don’t Like About Baskets

• High ticket size: The face value of privately placed bonds was recently reduced to 10,000 INR but we still don’t have that many bonds at this face value in the market. So when you combine 2-3 bonds in one basket, the minimum ticket size to invest in a basket can become a couple of lakhs making it a big entry barrier for retail investors. As the market matures and more 10k bonds come into the market, this will solve for itself.

• Lack of flexibility to customise: Specifically for Grip’s baskets, you don’t have the flexibility to customise the basket constituents. You may be uncomfortable with one name in the basket, but can’t exclude it.

Though the curated bonds in Grip’s basket are recommended by a SEBI registered research analyst, if we look at a similar product by one of Grip’s competitors, IndiaBonds, the basket ‘BondCase’ offered by IndiaBonds lets you select from a list of bonds when curating your basket based on the chosen theme. At the end of the day, you need to decide what works for you!

Conclusion

In conclusion, it's fair to say that baskets, offered by platforms like Grip, TheFixedIncome, and IndiaBonds, have many benefits. If you are particularly a first time investor, it can be a good way to enter the bond market where you are not overwhelmed by the idea of selecting 1-2 bonds from 100s of options.

Specifically, Grip's Basket allows investors to choose from curated themes that match their financial goals, return expectations, and risk tolerance. With the expertise of a SEBI-registered research analyst supporting the selection of curated bonds/SDI, investors can trust the quality and potential of their investments.

While the lack of customization might be a downside for some, the convenience and diversification provided make Grip's Basket an attractive option for those wanting to simplify their bond investment strategy without the headache of detailed research among the many bonds available in the market. But to be fair, there are other OBPP like The Fixed Income, IndiaBonds that also offer this option.

But again, as always, remember that it's important for investors to do their due diligence. Thoroughly review all related documents and consider the associated risks before making any investment decisions in any asset class.

Thank you for reading this article, and thank you to Grip Invest for powering the AltXtra series. We have some more interesting pieces coming up, and we hope you will enjoy them. If you have any feedback, please don't hesitate to reach out to us at ALT Investor or Grip Invest.

Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. The investor is requested to read all the offer related documents carefully and to take into consideration all the risk factors before subscribing to debt instruments.

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.

Neither ALT Investor or its associates/associated entities, assigns or affiliates takes or accepts any liability for consequences of any actions taken based on the information provided.