A stronger secondary market can drive the next phase of retail bond investing: Suresh Darak

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Bonds were once an unfamiliar investment avenue for most retail investors. The rise of online bond platform providers (OBPPs), however, has made them easier to discover, understand and access. Retail bond turnover has grown sharply, with monthly volumes now crossing ₹ 2,000 crore, according to Suresh Darak, founder of FixedAlpha.com, an investment platform.

Darak discusses the changing retail bond market, the products available to investors, how bond yields are determined and why the development of the secondary market could be the next big step for retail participation.

OBPPs have played a key role in educating retail investors about bonds. Before their emergence, retail bond turnover was estimated at around ₹ 100 crore a month. Today, it has expanded to over ₹ 2,000 crore a month, reflecting growing investor awareness, improved digital access and greater availability of fixed-income products. With the market witnessing strong month-on-month growth, potentially approaching 10% in certain periods, we believe monthly retail bond turnover has the potential to reach ₹ 10,000 crore over the next few years.

Can you tell an investor that they should buy only Nifty 50 stocks, BSE Sensex stocks or only blue-chip stocks? No. Investors also buy small-cap stocks and various other products based on their risk appetite.

Similarly, in bonds, borrowers range from AAA to BBB. Within that category, there are high-quality borrowers who may be borrowing at 8%, while there are others borrowing at 12-13%. Investors have the choice to select bonds based on their risk appetite and the return they are looking for.

There is also a well-established ecosystem when it comes to bonds. There are rating agencies that rate the bonds, debenture trustees that hold the securities, and exchanges where bonds are listed. The ecosystem is quite strong, and investors have access to information that can help them make an informed decision about which bonds to buy.

Broadly, there are two types of bonds: government bonds, which are sovereign securities issued by the central or state governments and do not carry credit risk in the same way as corporate bonds . The second is corporate bonds, which are issued by companies raising money from the market.

There are also variations of these products, such as securitized instruments, where various receivables from a particular category of lending, for example, housing loans, are pooled together.

However, retail investors should have at least seen one complete cycle of two to three years to understand how the bond market functions, because evaluating some of these products requires deeper expertise. From a retail investor's perspective, it is better to focus on direct bonds, such as government and corporate bonds, rather than products that require a deeper understanding of securitization structures.

The issuer's pricing is determined by several parameters. One is the issuer's credit rating. For example, there will be a difference between a AAA-rated bond and an AA- or BBB-rated bond.

Assume a AAA-rated 10-year bond is currently quoted at 8%.