Debt market : What you need to know about this investment

Debt market : What you need to know about this investment

21 February, 2023

The debt market, also known as the bond market, is a marketplace where fixed-income securities are traded. These securities, also known as debt securities, are issued by either central or state government, government entities, municipal corporations, and even commercial institutions, such as banks, financial institutions, companies, etc.

Commercial entities, including private and public sector companies, may prefer to issue debt market securities to avoid using their business funds or diluting their equity holding.

Types of Debt Market

Broadly speaking, there are two types of debt markets: money market and long-term market. Here's what you need to know about the two.

Money Market - The money market is where short-term fixed-income securities are bought and sold. Such securities include the likes of treasury bills, commercial papers, deposit certificates, etc. These instruments generally have a maturity timeline of up to one year.

The Reserve Bank of India (RBI) actively participates in the money market, thus influencing the country's money supply and interest rate. Apart from the RBI, banks, NBFCs, the government, fund houses, provident funds, primary dealers, and retail investors also participate in the money market.

Long-term market – The long-term fixed-income market comprises government securities and state development loans (SDL). Government securities, commonly known as G-Secs, are issued by the central and state governments. Short-term G-secs are treasury bills, which are a money market instrument. Long-term G-secs are also known as government bonds. SDLs are issued by state governments to cover their fiscal deficits. They are issued for ten years, with a half-yearly accrual of interest.

How do debt market instruments work?

Let us understand how some of the most popular debt market instruments work and how you can invest in the debt market in India.

  • Treasury bills: T-Bills are issued at a discount on the face value and mature at face value. Your profit from this investment is the discount amount. For example, you may have bought a T-bill of ₹ 100 at ₹ 90 and received ₹ 100 on maturity. T-bills have a maturity of 91, 182, and 364 days. If you have a surplus of funds and want an investment with good yield, you can buy T-bills can for a minimum of ₹ 25,000 through a demat account.

  • Commercial papers: These can be bought from renowned companies that seek to raise funds through this instrument. It involves a minimum investment of ₹ 5 lakhs, and while it can be bought in physical and Demat form, the latter is a preferrable choice for easy tracking and managing. You can also invest in commercial papers through exchange-traded funds.

  • Certificate of Deposit (CD): A CD trade can be agreed upon between willing buyers and sellers. The transfer is done by the NSDL (National Securities Depository Limited), which acts as the depository participant. Negotiable CDs have a maturity span of up to one year and can be traded in the bond market. However, non-negotiable CDs attract a fine if traded before maturity.

  • G-secs: To invest in G-secs, you must register with a stock exchange or invest through gilt funds. Investments are made through non-competitive bidding on the NSE website or the NSE goBid app.

Besides these, instruments like Call Money and Collateralised Borrowing and Lending Obligation (CBLO) are also popular in the debt market. However, the call money market is where surplus bank funds are traded, keeping the RBI's bank reserve limits in mind, while CBLO is used by institutions that cannot borrow from inter-bank borrowings.

Choosing Suitable Debt Funds

You can choose to invest in different instruments in the debt market. For retail investors, debt mutual funds offer the most convenient investment opportunity in the money market and long-term fixed-income instruments. But before you start investing, here are a few things to consider:

  • Investment goal – Depending on how long you want to stay invested, you can pick from short-term funds, such as liquid funds or gilt funds that invest in g-secs.

  • Risk appetite – Choose investments as per your risk appetite. For instance, mutual funds that invest in corporate bonds may have a higher risk than funds that invest heavily in government instruments.

  • Credit rating – Although debt funds are less risky than equity funds, different debt funds have different credit ratings, ranging from AAA+ to D rating. High-risk funds generally offer a higher return. So, check the credit ratings and choose a fund to invest in based on your expected returns and risk appetite.

  • Diversification – Even while investing in debt funds, it is better to diversify across different types of funds. Complete allocation in one particular type of fund is not recommended.

To Sum Up

From short-term funds, like overnight, liquid and ultra-short duration funds, to credit risk funds, gilt funds, and corporate bond funds, there are various types of debt funds to choose from.

You can start with minimal investments and even ensure financial discipline by investing in SIPs as well.

Get started with debt market investments with an HDFC Bank Demat & Trading account, which you can open online in three steps to take control of your financial future today!

To Open Your Demat Account, Click Here.

Eager To Explore How To Invest Surplus Money? Click Here.

*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.

Get Started with Your Demat Account, Click Here!

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