Three to four years ago, mutual funds were highly regarded in this area, offering high yields by taking on credit risk. However, the bet was strongly unraveled after the wave of defaults after the IL & FS crisis in September 2018, with six Franklin Templeton bond funds frozen in April 2020.
The open-ended structure of mutual funds remained vulnerable to panic attacks on high-risk debt. Over the past two years, the Securities and Exchange Commission of India (Sebi) has tightened regulations on investment trusts in this area, with investors reducing their overall allocation to credit risk funds.
In the credit risk category, assets ￡Rs 7.9643.3 billion in April 2019 ￡In April 2021, it was Rs 2.5385 billion. However, the need for high-yielding credit risk funds has not disappeared. Instead, the FinTech Platform and Alternative Investment Fund (AIF) intervened.
WintWealth, a fintech platform that allows investors to buy high yield bonds, was launched in January. Its early investors include Zerodha’s Nithin Kamath and Cred’s Kunal Shah.
This platform allows investors to buy dead paper with the smallest ticket size. ￡10,000, yield 9-11%. Listed MLDs started with market-linked corporate bonds (MLDs) because capital gains are taxed at 10% after a one-year holding period. Wint Wealth has partnered with NBFC to buy MLDs in the primary market and sell them to investors in the secondary market, earning a spread of around 2%.
However, Wintwells is now increasingly listed on regular debt with monthly interest payments due to investor demand. The platform focuses on bonds backed up by covered bonds or AA to BBB space security.
Wint Wealth co-founder Ajinkya Kulkarni said: It’s not just about credit ratings, because we think there are gaps in the system. We have our own due diligence. “
So far, Wintwels has published around ￡According to Kulkarni, the debt of Rs 5 billion through the platform counts as a base of 5,000 investors. Larger wealth management companies also offer MLDs, but some have stronger equity components (stock market-related returns and fixed factors).
“Our MLD has a strong and genuine market connection. So, for example, if Nifty doesn’t make a profit for the next three years, you just get your capital back. The debt yield given is 7.5% and will be issued around ￡“MLD of Rs 30 billion a month,” said Feroze Azeez, Deputy CEO of Anand Rathi Private Wealth Management.
Anand Rathi only issues MLDs from his own NBFC to minimize credit risk, he said.
Another platform, TradeCred, offers investors yields from bill discounts. Bill discount is the process by which a supplier of a large company who cannot wait for money sells a bill to an investor in exchange for a small haircut. This, in turn, is a source of investor returns.
“Suppliers to large companies like ITC often cannot wait for payment. Therefore, they are prepared to sell invoices to investors at a discounted price. Investors such invoices. You can make some profit by purchasing books. Currently, the annual rate is 12 to 13% on the portal. The period is 30 to 90 days. Carefully select and invest in A-rated companies. The house must be selected from the list. ￡50,000 applies to each investment, “said Kunal Tekwani, co-founder of TradeCred.
TradeCred hasn’t seen a single bill dispute so far in the three years since its existence, he said. However, a stable supply of high-quality invoices is becoming increasingly difficult due to high demand. Revenue from bill discounts is considered income from other sources and is taxed at the slab rate.
For HNWIs (HNI), AIF provides a more structured means of acquiring high yield bonds. The minimum ticket size for AIF is ￡1 roll. Vivriti Asset Management, 2-year-old debt fund manager. ￡To date, Rs 150 billion has launched a series of AIFs in debt space for papers rated AA or lower.
Soumendra Ghosh, Chief Investment Officer of Vivriti, aims to provide investors with a 6-10% after-tax yield at a 40% tax rate. AIF has a pass-through tax. That is, the fund is targeting a pre-tax yield of 10-16%.
The default rate of debt raised through curated platforms has been only 0.17% over the last four years. A period that includes democratization, the collapse of IL & FS, the deployment of GST, and two covid waves.
“There is a gap between the 3-6% offered by mutual funds and high yield funds with yields above 16%. We are targeting that middle range. 70-80% of investor money Flowing into space above AA +, yields on A and BBB will rise dramatically. This additional reward is much higher than the delta increase in risk / default rates, “said Vivriti Asset Management founder and top management. Vineet Sukumar, who is responsible, said.
In another example of AIF expanding into this space, Sundaram Alternatives (SA), an alternative asset manager owned by Sundaram Asset Management Co, has announced the launch of a third real estate debt fund. SA currently manages two real estate funds.
According to the company’s announcement, the total IRR of the portfolio was about 19%, and SA’s high yield bond fund I repaid about 61% of its capital within three years of its final closing.
Even if opportunities arise in high-yielding areas, the risks remain. “Investors should be aware that these are high-risk products and it is important to understand them,” Kulkarni said, referring to the debt products listed in Wint Wealth. ..
Those who have accumulated real estate debt in the last cycle have seen serious losses.
“I don’t see debt as a profitable place. Equity meets that need, but if you need higher debt repayment, like a credit risk fund, it’s a regulated organization. Consider the sector first. If you are considering a fintech platform, check its pedigree and brand. Look for a reputable one. Also, look at the underlying debt rating. Please, this should be in line with your risk needs, “said Kalpesh Ashar, founder of Full Circle Financial Planners and Advisors.
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Investors Rely on AIF and FinTech for High Yield Bonds
Source link Investors Rely on AIF and FinTech for High Yield Bonds