Currently, mutual funds are not allowed to invest in non-investment grade bonds in India. However, in the USA, mutual funds play a significant role in the high-yield bond investments. Similarly, junk bond market in India should also be opened to mutual funds, pension funds and insurance companies with constraints of portfolio quality. This will also give robustness to the market against occasional shocks of default.

New debt instruments like deferred coupon bonds, step-up bonds, PIK (Payment-in-Kind) bonds, etc., should be introduced.

Development of analytical tools to understand the effect of high-yield bonds on a multi-asset portfolio.

This phased implementation should ensure that the market attracts a broad array of investors including mutual funds, insurance companies, pension funds, hedge funds and 'high net worth individuals'.

5.5. Benefits of Phased Implementation

This approach will help overcoming some weaknesses and countering potential threats: -

Regulation and strict control in initial phase will keep manipulators away to the large extent inducing confidence among investors

A large number of corporates entering this market will provide required diversity.

High yield, availability of real-time information and diversity will boost secondary market operations. This will give desired liquidity to the market which in turn will attract more investors

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* Contributed by -
Neha Agarwal & Padmakar Kulkarni,
PGDIM - XI,
NITIE, Mumbai.