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Proposed Junk Bond Market in India - Scenario (Optimistic & Realistic)

An optimistic scenario would be having junk bonds in the market ideally for funding by FIIs for financing the small Indian companies. However, considering the risk associated with these bonds it might not be possible in near future market which has its economy still in its nascent phase and on a fast development track.
So any move which can affect future inflows of foreign funds and investor confidence would not be ideal.

However, what is feasible and can be done is a realistic scenario.

The only way an investor should invest in junk bonds is by diversifying. A selection of at least half a dozen issues will afford the investor some protection. Better still, if the high risk does not deter the investors, a high-yield mutual fund will give them professional management in a treacherous market. In addition, it can buy and sell these bonds without the concession in price associated with trades of a few securities.

High risk is inherent in high yield bonds. Nevertheless, your portfolio may well have a place for some of these securities if you are not risk-averse. While you should not structure a retirement portfolio around junk bonds, some fractional percentage of them will raise the return for your portfolio as a whole.

By having junk bond markets, it would in fact signify deepening and maturing of Indian debt markets. In India, companies are hamstrung by the fact that investment relaxations may come in only when the debt markets get deeper, so that insurance companies can increase their portfolio yield without exposing themselves to risk for long tenures by investing in junk bonds.

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* Contributed by -
Ankit Chetan & Sudhanshu Duggal,
National Institute of Industrial Engineering (NITIE),
Mumbai.