A debt market is also known as a ‘fixed income market’ as debt instruments pay fixed returns. The Bond Market is part of the debt market. Debt markets are now considered an alternative route to banking channels for finance.
Fixed Income securities offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument. The debt securities are issued by the eligible entities against the moneys borrowed by them from the investors on these instruments. Therefore, a lot of debt securities also carry a fixed charge on the assets of the entity and generally enjoy a reasonable degree of safety by way of the security of the fixed and/or movable assets of the company.
Some of the benefits to the investors in debt instruments are:
- The investors benefit by investing in fixed income securities as they preserve and increase their invested capital and also ensure the receipt of regular interest income.
- The investors can even neutralize the default risk on their investments by investing in Govt. securities, which are normally referred to as risk-free investments due to the sovereign guarantee on these instruments.
- The prices of Debt securities display a lower average volatility as compared to the prices of other financial securities and ensure the greater safety of accompanying investments.
- Debt securities enable wide-based and efficient portfolio diversification and thus assist in portfolio risk-mitigation.
- Almost all debt instruments have a rating assigned to them by a Rating Agency which enables the investor to choose his degree of risk and corresponding returns.
Do you know the impact of the debt market on the economy?
The Asian financial crisis in the 1990s stressed the importance of a fully active debt market; the lack of which aggravated the crisis. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies.
How do the debt markets impact the economy?
- Opportunity for investors to diversify their investment portfolio.
- Higher liquidity and control over credit.
- Better corporate governance.
- Improved transparency because of stringent disclosure norms and auditing requirements.
- Less risk compared to the equity markets, encouraging low-risk investments. This leads to inflow of funds in the economy.
- Increased funds for implementation of government development plans. The government can raise funds at lower costs by issuing government securities.
- Implementation of a monetary policy.
- Reduced role of banks and political intervention in use of funds, as banks have to follow norms laid down by the central bank.
SBI DFHI Ltd. is an active participant in the Bond Market. Through SBI DFHI Invest Plus, investors can purchase investment grade Corporate Bonds for their portfolio (details available on the website).