Transcription
The bond is nothing but the instrument. Once you, when you invest in a fixed deposit, what is a fixed deposit? It is a receipt which is given by a bank to you. That, you know, it is written there that you have given or you lend money to a bank, so much money, and at this rate. A bond is also the same thing. It is in writing. You are getting some confirmation that this is the interest and principal you are going to get. That's it. That is called the bond.
The advantage of a bond is you can hold. You can decide to hold till maturity. On maturity, till the maturity, you will get the principal on maturity and interest at regular intervals. But in case if you require money, you can sell a bond just like equities on a click of a button on the market, and you will get your money on the next day. Till the time you are holding the bond, you will get interest for your hold period. That's the advantage of a bond, folks. Welcome to PESA. I'm your Anupam Gupta, and in today's episode, I'm thrilled, really thrilled, because after a very long time, we are going into the fixed income segment. We are talking bonds with my guest, Suresh D, founder, Bond Bazar. Suresh, welcome to PESA.
Thank you so much for doing this for our audience. Thank you, Anupam, to invite me in this show. It's great to have you here, Suresh, because bonds are something that I don't think the retail investors understand as easily as they do equity. I, I don't know who it was who said, "Gentlemen prefer bonds." It was some famous economist. But let's start from there. Now, what are bonds? You know, how are they different from everybody's favorite product, which is a fixed deposit? Of course, now it's also a debt mutual fund. So, what exactly are bonds? What are the different types of bonds, actually?
You'd be surprised that, you know, once you try to compare bonds with equity, because a bond is much simpler, and everybody actually, uh, directly or indirectly, uh, you know, the type of, I will say, the type of bonds which we are talking about are involved in their life. It is not that nobody is involved. What is a bond? It is simple. You are giving money to somebody, and in return, you are getting interest and principal. It is just like you are, you know, lending money to somebody. Yeah, and in return, you are getting interest and principal. It is the same, nothing else. But till now, you are giving money to whom? Banks. In return, they are giving you interest and principal. Maybe to one of your friends. The same thing is there. Now, you are giving money to government and corporates, high-rated corporates. In return, you are getting interest and principal. The only thing is the difference is, a bond is a regulated product, and it is easily tradeable on the market. That is the added advantage with bonds. And the bond is nothing but the instrument. Once you, when you invest in, uh, fixed deposit, what is a fixed deposit? It is a receipt which is given by a bank to you. That, you know, it is written there that you have given or you lend money to a bank, so much money, and at this rate. A bond is also the same thing. It is in writing. You are getting some confirmation that this is the interest and principal you are going to get. That's it. That is called the bond. The advantage of a bond is you can hold. You can decide to hold till maturity. On maturity, till the maturity, you will get the principal on maturity and interest at regular intervals. But in case if you require money, you can sell a bond just like equities on a click of a button on the market, and you will get your money on the next day. And till the time you're holding the bond, you will get interest for your hold period. That's the advantage of a bond. And that's a short, I mean, or as far as close to as short as as possible. The interest, I'm saying each and every year.
Yeah. Sir, so given that this is still relatively a new space for retail investors, you know, the concept of buying and selling bonds on a platform. I want to start with clarifying on what exactly is Bond Bazar in the whole world of regulations. Because I remember SEBI had taken out this paper a few years ago about online bond platforms, OBP, because SEBI had also realized that this market, this segment, the players in that are offering bonds, and there are transactions happening, but it was not regulated. And then it got regulated. So, I think if we can explain to our audience in terms of regulations, what exactly is Bond Bazar?
Okay. So, a bond is a highly regulated market. One is, uh, it is like from the issuance till secondary market. When the bonds are issued, SEBI regulated merchant bankers are part of the bond. They are issued just like equities. Simple. The process is as good as equities. That is the first part about the bond issuance. And when you are buying and selling bonds, the way you buy and sell equities on the exchange, you can buy and sell. Again, regulated. That is the same thing. So, the people who are providing you the platform to buy and sell bonds should be regulated. Yeah. So, first thing, they come under the scanner of SEBI. You should be a SEBI regulated broker. Now, what is OBP? It is Online Bond Platform Provider. Okay. This is a short form. What SEBI saw, uh, you know, probably since 2020 or '19, some players started offering bonds without taking a license. If you go to the earlier laws of National Securities Act or something like that, so there it is clearly written, if you are dealing in securities, you should take a license from SEBI. But certain people were offering bonds without taking a license from SEBI. So, SEBI came out with specific guidelines for bonds that if anybody is offering bonds online, you know, they should follow guidelines which is called Online Bond Platform Providers. This is what online. So, first thing, you should be a broker with SEBI, SEBI registered broker of BSE and NSE. And then additionally, you should take an Online Bond Platform Provider sub-category license. So, this is what the regulation is all about. What it means, what regulations means, that when you are selling bonds to a third party, to anybody, any customer, there are minimum disclosures about a particular bond should be there. Like rating, ration should be there, information memorandum should be there, coupon should be disclosed, yield should be disclosed. There are certain 7 to 8 parameters should be there. Second thing is, all the bonds should be bought and sold through the exchange platform. Okay. Earlier, what people were used to do, like, uh, they were selling bonds and a retail customer is buying bonds. They used to tell the retail investor, "Transfer money in my bank account, and I will transfer securities in your demat." There can be a chance of fraud, right? Retail here, you can sometimes you don't know whether the settlement of the transaction is done properly or not properly. You may sell that the bond is sold at 10% coupon yield, but actual yield to the retail investor maybe 9% because there is no intermediary. SEBI, with this regulation, brought the exchange into the entire picture. That was a game-changer. Transparency is coming. Trust is coming. And it is also ensuring that the settlement is through a SEBI regulated platform, which is BSE and NSE. So, that increases the confidence for someone.
Absolutely. Someone like me who wants to buy and sell bonds, I know what I'm getting into. Is there, then SEBI, I can file a complaint with SEBI and take it from there? Absolutely. Versus before where it was, there was nothing. So, recently, if you've seen, three platforms were banned by SEBI because they were selling products which was not regulated by SEBI. And SEBI was very particular that first thing, you have to be an Online Bond Platform Provider. Second thing, you should not sell products which are not SEBI regulated or any other regulators, like even RBI regulator or something like that. Because, you know, they want to protect the retail investors. And so, the retail investors should be very clear that whenever they are buying bonds, the platform should be SEBI regulated. They should have an Online Bond Platform Provider license. It protects their interest. Folks, please keep note of that. That if you're interested in buying bonds, because, you know, bonds are sold by anybody and everybody with this promise of high interest rates, high yields, and God knows what. Just please ensure that it is SEBI regulated. You will find that on their website, the license numbers, the license documentation, everything has to be there on the website. Absolutely.
So, you also mentioned brokers, Suresh. Um, so I'm assuming that your normal broker for equities, someone like an HDFC or Kotak or SBI, whoever it is, also offers bonds, right? Or they don't? I, I don't know. So, how are you different in that way?
See, how bonds are offered, primarily there are two platforms from where the retail can buy and sell bonds. One is the cash segment. It is the same cash segment where, you know, equity, F&O, everything is available. Both are regulated by BSE and offered by BSE. But the advantage of the cash segment is, you know, it is an anonymous trade and guaranteed settlement. Anonymous trade in the sense that you don't know who is the buyer and seller. So, you get the best price of all the bonds. And all the bonds are by default listed on the cash segment of the exchange where all the equity brokers, everything is. The problem is, it is not a user-friendly platform. They just tell you that, you know, this bond is available at 102 rupees. As a retail investor, what are you going to make out of it? Nothing. What do you want? That 102 rupees means I'm getting 11% yield, 10% yield, or something like that. It requires a lot of automation, everything that equity guys have not done. But the entire feed and everything is on, is available on the exchange. That is one platform. But the advantage of that platform is that you can buy and sell any bonds. You can sell also. That's the biggest advantage. So, for the retail customer, that is one of the best things, the cash segment. And all the bonds are available from 7% to 20%. There is a government bond also available, there is a corporate bond also available. They can choose what they want to buy. That's the best thing. Now, it comes to the other platform, which is called Request for Quote platform, where only bonds are available. Now, the disadvantage is, the broker is a seller, and you are the buyer. Okay. Now, you can buy only those bonds which the broker is selling, only at that price where the broker is selling. And second thing, you can't sell it back. You can't sell those bonds to them. If they want to buy, they will buy. If they don't want to buy. So, there's a big difference between cash segment and RFQ segment. Okay. But the advantage of RFQ segment is, they will quote one yield, that 11%. You can't quote the yield what you want to. But there, there are some special bonds are also available for you. So, both platforms have their uniqueness. One of the thing is, but the biggest thing is, are the people there are people like, you know, us, who offer bought the platform from the retail perspective for buying their choice. They can buy any bonds and sell also. And that's what cash market offers them. That's what when we saw equity and those brokers, it is actually no broker is offering as such. They are not offering bonds. They have an infrastructure, but they don't have any incentive to offer bonds. There's no money to be made there for them. There is no money to be made. So, why do, in fact, if you buy the bonds, you will not trade in F&O. Yeah. So, why to give you a platform where you can make money also, good money, but they will not make money.
I, I mean, there's also the fact that bonds, for the longest time, have been an institutional product. You know, large companies, large banks buy and sell it. For retailers, it's still something relatively new. We'll come to that. When we are talking, I want to know about your journey now, right? You're also a CA. Bond Bazar started in 2020, of all the years to choose. Tell us about that. Your, your team is very interesting. So, what was the idea behind this?
See, I think, uh, you know, yes, I am a corporate banker. My largest journey was in L&T Financial Services. I was part of the core team to set up L&T Infra Finance in 2006. Somewhere, 15 years, largest part of my career was in L&T Financial Services. And that time also, it was more like a startup, you know, first time private sector player is coming to do it. And it becomes one of the largest infrastructure financing institution in India by the time I left in 2019-20. So, you know, somewhere, you know, infrastructure was also taking a shape. And, when the counterparty risk, when the risk is reduced by the government post-construction, all the infrastructure players were raising money from the bond market. And that's why I started thinking that let me get into the bond market. Somewhere in 2013-14, and then between four to five years, it became one of the largest bond desk for infrastructure projects. But in 2018-19, I realized that, you know, primarily only institutions are subscribing bonds, and they are fair with the friends. When the crisis hit, when the liquidity crisis are there, they stop subscribing to bonds. You know, in fact, everybody becomes a seller. That's where somewhere in 2016-17-18, it hit me the idea that, you know, retail is not there. Retail is there indirectly because, you know, retail go to the banks, do the FD, and the banks are buying the bonds. They give money to the mutual funds, and then they are buying the bonds. Insurance companies, and they are buying the bonds. But in the process, they lose 3 to 4% interest because, you know, of course, intermediary means they will make money. But retail, there is one big advantage. They are actually the market makers. During bad times, you might have seen in the equity market, whenever the market is falling, retailer is the biggest buyer. Now, today, the situation in equity market is, they are matching the sell volume of DII and FII, which is a big thing. That's why it struck me the idea that let's create a platform where retail can buy and sell bonds. And that's where, you know, thought of bond market. So, here the purpose was not just to create a platform where you are the seller and retail is the buyer. You wanted to create a platform where the buy and sell both are possible. And the minimum amount should be as low as 100 rupees. Like today. Wow. Government bond, 100 rupees. Corporate bond, 1,000 rupees. Okay. It is absolutely retail. Any quantum you can buy and sell. But of course, when you think about all those things, it means you are creating something like, you know, equity market automation. Somewhere started in the '90s, '95 or something like that. It requires a lot of good people who can understand, decode the market, because bond is a highly regulated product. You require a good team who understand the regulations also. Good operations, tech, market, everything. Yeah. First thing is comes the tech operations. So, the team is really good. Everybody liked the idea. The first thing was having a partnership with Trust Group. NEPA was very keen to start the journey with this entire. And they are one of the largest bond market players in India. It is always good to have a partner with you who understand the market well, who have a long-term vision. And then the team building started. And good, really good people from the various market players who have a good experience in other things. When I was building a team, one of the thing was that we are not here to sell a tech platform. M. Because retail is not going to come to me to buy, you know, you have created a really, really good, amazing tech platform. That is the ease of doing transactions. They were here to buy bonds. And they want that confidence that, you know, you are, they are buying good bonds, they are getting good advice to buy a good bonds, and they are very well-researched. And that's why when I was building a team, the people from the bond market, the people who have spent a lot of times, decades of experience in the corporate finance, they become part of the team. And that's how the journey started in the bond.
Very interesting. Here, now moving on to the actual investment part, you know, um, the, the product like you said, bonds. Who is bond investing for? And who is it not for? It is for whom, right?
I tell you one thing, when, uh, you know, we all seen, uh, in fact, just one incidence is there. My maid was using the Uber now. M. And sometimes you will find that, you know, it is too difficult to get the Uber nowadays. Yeah. When Uber started in 200, probably 10 years back or something, or 12 years back, it was a vehicle for probably the upper class. Just book and it is good. But at that time also, the fare was as close as to your auto fare. Right? It means technically, it was good for everybody. The entire 140 crore of people, actually, it is good for you. But you can't do the marketing thinking about that. You have to first make it popular with the elite class or something like that. One. Okay. Like bond is also the same thing. Is there? There are 75 crore people who are investing in fixed deposits. Wow. Or their money is lying in savings account, in current account, in savings account. You're earning less than 3%. In current account, you're earning 0%. You know that how much money is lying in savings account? I'm sure it's a huge number. I have no idea about the quantum. Absolute number. But 70 lakh crore. Wow. Current account, 20 lakh crore. Oh, okay. 90 lakh to 100 lakh crore, which we call Kasa, is actually the income of all the banks. If you even assume 8 to 10% return, it means 8 to 10 lakh crore. That's the entire profitability of all the banks. Then there is 100 lakh crore in fixed deposits, where there is 7% return or something like that. If you are investing for less than 30, 3 months or 4 months, sometimes you get less than three and a half, 4% return. So, this product is good for everybody who has money, who has kept money in the banks. Because suddenly, you are getting anything between 3 to 7% higher returns. That is first thing. Just doing some bit of more understanding about your money. Why to be lazy? Do some more understanding. Then, advantage of bond market is, you can sell anytime. Sure. On click of a button, within 24 hours, the money is there in your bank account again. So, you are getting higher returns, you are getting liquidity. When you want the liquidity, that's the advantage. So, just by reviewing, providing direct access to you, it's a huge advantage. And see, now when you say it is good, right? The immediate question, right? The reality of the entire life is, banks name. Ah, okay. The, then distribution. Now, think anything, any product you can think of, actually banking channel was used to pool to make the correct. Yeah. Mutual funds, policies, FDs. Yeah. It is a counterproductive to banks. Why to tell the people, "Don't keep your money in the saving account," or F deposit. So, distribution channel will always be compromised. So, people have to put really good efforts to create the distribution channel and educate people about this one. Yeah. That is where the difference is there. That's where, you know, when you say it is good for whom, actually it is good for everybody. Okay. But the first thing is, uh, the people who understand the market, who can actually spend time, once they will start understanding, they will become more disciplined. They will come in the bond market first. Yeah. And once people, the other people, we learn from them. Okay. They are making money. So, it's a long process.
Yeah. I, I mean, I just have one point there on capital risk. Bonds also carry capital risk depending on interest rate cycles and all that. So, there is that element also in this, which an FD you don't have any capital risk. Interest rate might be a little bit less. So, you know, so let me answer your question one by one. You said interest rate risk, right? FD, FD interest rate. But I'm saying return of capital. At least 100 rupees. Let's do one by one. You have done FD at 6% for 3 years. You are going to get 6% only. Yeah. Now, rate goes up by 1% or 2%. I lose that straight away. Bond also, you done at 11% return for 3 years, right? And rate goes up by 2%. And if you hold till maturity, is there any risk? No. You'll get your capital back. I'm, I'm saying that you're just buying what was a face value 100 at 102. 102 capital. You get 100, not 102. So, in the bond, it is the same. Yeah. If rate goes up, hold till maturity, there is no loss. Yeah. Now, second is about, you know, capital risk, you said, right? Something bonds fail. Are you getting something in return? There are issuances like DHFL. There was a 40% return was there. Return of capital was there. And that was one fraud. Let's be very clear. But advantage, what we make a mistake, right? When any market is developed, there are certain loose ends are there. People exploit those things. Which happened for, let's say, in certain cases also. But after that, regulator becomes much more tight, and then they ensure that such things are not repeated in the future. Sure, sure. The problem with the people is, they think about the past. What they don't think what has happened after that one. See, please understand, in India, we have really good regulators like RBI and SEBI. If there is some issue happened in the past, and if you are not part of that issue, and you are not getting stuck in that issue, be happy and enjoy the benefits after that one. Just imagine that, you know, 1992, you think that, okay, the fraud has happened, and after that, you get away from the equity market forever, rather realizing that SEBI might have become more vigilant after that one, putting right infrastructure in place, and after that, there was real growth in the equity market. But you lose the entire journey because you had a memory of 1992.
Yeah, I take, I mean, I get it. I think what what I was referring to is, let's say that you buy a bond when interest rates are low, and when interest rates start to go high, then that 100 rupees that you've paid, or 102 that you've paid, will become 97, 98, 99. So, optically, once I have bought at H, and I'm selling at 98, after of course, taking into account the one year of interest that I've also got. Of course, if you're someone who knows how bonds work, it's not anything new. But let's look at other. Are you buying it for trading? No, I'm buying it to hold to maturity. If I'm in that category, then absolutely. Actually, retail is not a trader in the bond market. That is far away, probably 10 years down the line, once people will understand that bond market, man, trading is also possible, then they will think. Right now, I have not come across a single person who is trading in bonds. And how there can be trading loss? It reminds me of bank balance sheets. Right? You've got H and AFS, hold to maturity and available for. They are traders. They are traders. Mutual fund is a trader in the bond market. They can lose money. They can. So, that's where, you know, the difference is there. When you do a direct investment in the bond market, versus mutual fund. As a trader, when you invest in a debt mutual fund, do you know how much return you are going to get? No. Absolutely not. Absolutely not. You don't know what returns you are going to get. When you invest directly in the bond market, if you bought at 10%, and if you are holding till maturity, you are going to get 10%. That's the difference.
Yeah. So, folks, there's a section in the Bond Bazar website called Bond Shala, which all of you all should please, you know, spend some time in. See, understanding shares is fine. That's one thing. You know, you understand, okay, you buy at a certain price, you sell at a certain price, you get dividend, and there are mergers and swaps and all. Bonds are very, very different. It'll help if you spend some time on the website and educate yourself.
So, actually, you've kind of almost answered my question. Just before we go into a break, how is investing in bonds different from investing in a debt mutual fund? We just spend some more time on that, you know, because what happens is today, when you're talking about this with the person, mutual fund. Okay, let me try to simplify. Probably it gives some subjective answer, then probably it may help. What is a debt mutual fund? You can invest right now, and you can withdraw anytime. Right? So, the biggest thing is that they have to maintain liquidity because there can be withdrawal requests anytime. 10 to 15% liquidity, sometimes part of their AUM, right? Second thing is, you know, they will invest from one day to three years or four years, all sorts of bonds. Debt mutual fund means they are investing in bonds. That's the only instrument they have, right? That is one thing. Now, is a short-term maturity bond is there where the coupon is less? Long-term, the coupon is high. Correct. So, this is called debt mutual fund. So, if you have money, you don't know when you will require money. You may require money after 15 days, 20 days, 30 days. Best to invest in debt mutual fund because whenever you require, in one day notice, you can withdraw the money and something like that. Sure. But then, suddenly, you are an investor with a two-year horizon, and you go to the debt mutual fund. Actually, you subsidize to the people who are investing with two days or three days or five days. They want to withdraw money because that 10% cash which is keeping, which is yielding hardly anything, because he will invest in some treasury bills or something like that. Yeah. That brings down your return. Second thing is, the people who can withdraw any money, they have to invest in the in the regular maturity mutual bonds and all other things which yield higher return. So, there are two categories. The people who want to withdraw money anytime, just by investment, and anytime in the less than one month. Let's say, debt mutual fund is the best. But when you are investing with some at least 5 to 6 months hold period, after that, even if you can get liquidity in the bond market, you can sell the bonds. Direct investment is better for you. Very interesting. Because the debt mutual fund guys will invest from 6% to 9%. Everything, because 9% is longer-term maturity, slightly less liquid, and all other things. And 6%, 7% is really liquid because they don't know when they are going to get the liquidity. You know that what happened in the Templeton, right? When there is a withdrawal, there's a huge withdrawal. They're running that risk. So, if it is very short-term, go to the debt mutual fund. But if you have some horizon, 6 months or more than 6 months, or definitely if you are investing for 2 years or something longer, the better, definitely go for the direct investment in the bond market. You can increase your return at least by 3 to 4%. Very interesting.
So, folks, on that, we're going to take a small break now. That we've explained to you how the product works, how Bond Bazar works. We'll be talking about specific strategies and how the bond market looks now to Suresh. All of that right after this short break.
Hello, it's been another great week on IVM Podcast Network. On a news show with HDFC Bank, we raise awareness about cyber frauds. The first episode features cyber crime investigator, D. Manan, and neurologist, Dr. Sid Warrior. It ties into digital arrest. Catch the episode on V for Vigilante YouTube channel. On Cyrus Says, Shibba Chada joins Cyrus and shares her journey from Delhi roots and theater days to her OTT hits like Mirzapur and Bandish Bandits. On A Century of Stories, Kunal unveils the incredible story of N. S. Tirumurti's daring submarine transfer during World War II, a testament to his unwavering dedication to India's freedom. And folks, if you like our show, spread the word. Tell your friends and don't forget to write and review them wherever you are listening to them. Follow us on social media. We are IVM Podcast on Twitter, Facebook, Instagram, and LinkedIn. You'll also find all our shows on YouTube by their show names. So, do look out for them and have fun watching. And finally, we would like to thank our sponsors of this week: IDFC First Bank, Axis Mutual Fund, SBI Mutual Fund, ICICI Prudential Mutual Fund, IndusInd Bank, and HDFC Bank.
And welcome back. Suresh, how do you source your bonds? As in, do you, like, are you like an exchange that you have every bond that is available to buy and sell on your platform, or do you also have to get that from somewhere?
See, what we do is, we are a player in the primary market also. Like, let's say, there is an issuance called, it is while alternate as major, which is, you know, the company who is managing the entire asset management business of IDFC Group, something like that. We do a 50 crore issue for them in a private placement market, and they place these bonds in the secondary market to the retail investors because, you know, you have to subscribe in this. So, this is one way we source our large part of the inventory. Sure. So, that's why probably, you know, um, to our retail investor, we just not charge anything because we get our fees from the primary market. That is one thing. Since we are providing access to the exchange platform also, where, you know, it is easy to buy and sell any bond, you know, our customers, let's say I don't have a particular inventory to offer to them, they can buy from that market from anybody else because anybody can be a seller. So, both ways, my customers are getting what they want. So, that is one way we are doing it. Of course, we can buy bonds from the secondary market also, because there are outstanding more than 45 lakh crore bonds are outstanding in the secondary market in the corporate, in rupee terms, in rupee terms. 40-45 lakh crores, right? So, this inventory is lying with all these mutual funds, insurance companies, provident funds, banks. So, if one particular bond, if somebody wants to sell, and we think it is good for a retail customer, we buy from the secondary market also and offer to our customers. Okay. So, that's possible. That is possible. Okay. So, then how many bonds are available on your platform for investors that sign up with you? You know, and just an approximate range of the credit rating, if, if that's possible?
See, ours is a perfect marketplace. So, anybody, any bond which is listed bond, by default is available on our platform to buy and sell. That's a big thing. Okay. That is different from other platforms. So, that is first thing. Whether I like it or don't like it, it is available. It's a marketplace, right? Any bond which is listed bond is available on the platform. On a daily basis, more than 4,000 bonds are quoted for buy and sell. Okay. On the platform because there are maybe more than 12 to 14,000 bonds which are actually listed on the platform. But 4 to 5,000 active quotes are available for the people to buy and sell. And maybe more than 5,000 crore worth of bonds are available daily basis. That's a big number. Yeah. And the range, you ask about the range. So, government bonds, there are more than 250 government bonds are available. Minimum investment is 100 rupees. Their range is normally 7% to 7 and a half percent. Yeah. And the tenure is 30 days to 50 years. So, in case of government bonds. Then second is about corporate bonds. The corporate bonds, government bonds are not rated. All are sovereign because the default risk is zero. That's why they are not rated. Whether it is a state government bonds or central government bond, both are sovereign. There is zero default risk. So, there is no rating for that one. When it comes to the corporate bonds, you know, from 8% to almost like 17, 18%, all the bonds are available. Okay. That's the range typically is there. And the rating from AAA to normally Triple B minus, up to Triple B minus, all the bonds are available. There was one, I think, South, some government, was it a discom, or was it an utility, or someone had defaulted recently last week? News, you remember that Telangana? What happened there?
Interesting. You know, these are certain interesting things. And since you raised this point, I will, before, I will cover two things there. Okay. One of the thing is, what happened in this bond? This bond was issued when Andhra Pradesh was undivided. Oh, okay. Okay. So, this company raised money. The bond, state-owned, state-owned company. This is Andhra Pradesh Power. So, again, sovereign? No. Okay. Andhra Pradesh Power Corporation is not a sovereign. It is a state-owned entity. Okay. They are prone to default. If they, that's one run lower. Correct. One run lower, right? These are corporates. It is actually corporates. But their borrowings were guaranteed by the Andhra Pradesh government. That if this guy will not pay, then I will pay. Okay. So, after defaulting, the government will step in and pay. Let's be very clear. First, the company has to default, then the government will step in and pay. Okay. That was a structure which used to be prevalent 10 years back, right? When Andhra Pradesh was united. Huh. All the bonds were guaranteed by the state. Was there? First, you have to default, then the state will pitch in and pay. And then it will cure the default. So, first, it means it has to default. Then the division happened between Andhra and Telangana. In this particular case, this company, the liabilities were also split between Telangana and Andhra. Okay. Okay. So, Andhra Pradesh and Telangana. But there was some bit of confusion remained about the liability. Okay. So, there was a huge issuance. Part of the issuance is already paid off by the, the Andhra government also, by the Telangana government also. But there was some confusion which was remained, which is, I think, it is pending in the court. That money will not come back. I think they already paid some bit of retail already paid. By the way, I think, see, of course, what I heard that, you know, they come together, chief minister. They are very clear that the, and they will state guaranteed. Ultimately, the money is going to come. But please understand that what happens when the, any state guaranteed bond, it is not, it is not Bond Bazar money. I, the owner of Bond Bazar, s, move on in life. Correct. But when it's going to state government, there is a, is officer. He needs a paper to make any payment. And very clear paper that yes, this liability is due, and I have to make this payment. That was not clear. And today, if you make the payment, okay? And then somebody raises this question, "How this liability was there? It was not Telangana's liability, Andhra's liability." Then that guy will be under much bigger scrutiny. This is the problem of this particular bond. It was unique. Okay. It's not an intent problem. It is a process problem. Still, both the chief minister are coming together, and it's a huge money. So, they, it is not that it is around one or two crore or five crore. It's a, crore of money. Let's say, massive number. But the best part is, both the government are coming together and resolving this. I'm sure very soon. Now, what is happening? This issuance has happened. This default is not of today's default. Huh. By the way, the default happened four years back. Okay. Okay. Just some news item come today. Doesn't mean the default has happened today. Sure. First thing, let's be very clear. The company is derated four years back. Wow. Okay. That's one thing. After this, Telangana, in fact, recently raised 10,000 crores to the bond issuance. Amazing bond issuance. But now, how the journey of state guaranteed bond has changed? Now, earlier, it was first your default, then the state government will pitch and cure the default, which is happening in this case. They will cure the default. Now, even before the default, they say that if the money with the company is, let's say, 6 months, next 6 months servicing is not there, state government has to pitch in and put that money in the account. So, it is before default. Now, that's why you see after the Telangana issuance, there may be at least 70, 80,000 crore is raised from the bond market by these companies through the state guaranteed. There is nothing and everything is getting surprised. So, this is a past issuance which is getting resolved to the court process. It will get resolved. New issues are different. They ensure that default per se should not happen. Before that, only state government should pitch in.
I mean, I like the fact you mentioned it's not an intent issue. Because share market, intent, you have a fraud promoter. Who, by the way, can you remember a single company where the guarantee was given by the central government or state government in the history of India where the default has happened and is not cured? Default can happen, by the way. You'd be surprised. Even in case of MTNL, there is one day default. [Laughter] No, I can't remember. Yeah, because there isn't any. Yeah. This is why, that's why, please understand, state guaranteed intent. The day you have an intent issue, and government is involved, you are living in a country. The sovereign concept. I mean, if I want to take risk, of course, when the regulator comes in, he will say, "Boss, technically, he can default." Technically. That's why I said, intent is more important. Just the process. Yeah.
Okay. So, you mentioned an RFQ portal in the starting of the show. Did you, were you referring to what's called the RBI Direct portal, or something else is there in that?
RBI Direct portal is totally different. Huh. Because I am used to that. Then, when, so that's a relatively new product. I'm using that as just a kind of comparison for people, you know, who say that, "Why should I go to Bond Bazar? I'll go directly to RBI Direct." Retail. But platform, you need to, you need to have some real. I tried, but I couldn't. And they also have an RFQ out. They, they also have this system. So, I'm just trying to compare the process, right? Bond Bazar, I'm sure, is pretty smooth. You've got RBI, which requires some amount of. So, first thing is RBI Direct Retail. So, you know, when you buy, only government bonds are available. Select government bonds, not all. There's no corporate. There's no private. No corporate bonds are available. So, only government bonds you can buy. Ideally, what they prefer that you buy in the primary market, because RBI is coming every week. They issue bonds, uh, for the state government and for the central government also. When they are issuing bonds, what they say, it is more like the way you do the debt IPO or equity IPO. Five days before, they ask the retail investor, four days before that, if you are interested, then give, and they collect some money, and whatever the cut-off yield is there, at that yield, they will transfer bonds to you. That is one thing. And second thing is, then in RBI Retail Direct, you can try to buy in the secondary market also, because that is more of a second. This is a primary and secondary, both the options are given. The problem is, secondary market liquidity is not there because there is no market maker. Yeah. First problem. Second thing is, only certain limited government bonds are available. There is a third and fourth problem also. What is that? All these bonds come in your CSGL account. That is something account. Because, you know, there is a demat account concept. Huh. Government bonds, there is a CSGL account, which is open with RBI. The Special General Ledger, general ledger, whatever it is, right? CSGL account, it is called Customers. So, the, the problem of that one is, let's say, if these bonds, you want to, if you are F&O trader, futures options trader, you have to give a margin money, right? So, that margin, instead of the margin money, you can give government securities also as a margin. Okay. But if it's part of the CSGL account, you can't give. Okay. Okay. It has to be part of your demat account. So, if you buy bonds on the platform like Bond Bazar, on the cash market, first, it comes in your demat account. Sure. Sure. Sure. In one view, you can see your portfolio and everything. It is easy for you to give it for pledging and borrow money also. And selling is also easy. So, that's a big difference. Even if it is only for the government bonds, forget about, because otherwise, anyway, you are not getting corporate bonds there. Yeah.
So, now let's get to the process of buying and selling bonds on Bond Bazar. What, what's it like? Like, I sign up on your platform, I guess that, whatever Aadhar, PAN card, etc., etc. What happens next? That I decide that, "Che, take it at fun," that I want to buy bonds. Let's say that I've got a lakh rupees, and I want to buy maybe two years. So, do I put in the specifications out there, and then you suggest what? So, how you buy equity? Direct equity? I don't know. I know that I have to buy Reliance or I have to buy it. That's as simple. So, let's say if you want to buy equity on the zero. What do you do? First, you complete the KYC. Yeah. Aadhar card, PAN card, bank account details. These are demat account. Whatever, yes. Demat account, in the sense, in the process, it gets opened automatically. Yeah. After that, they activate your account. It takes 24 hours. Slightly. You open the app, go to the app, add money. M. Select the bonds. Bonds. Buy it. It's done, right? Okay. Okay. As good as equity. Same as good as same process. Now, if you want to sell the bonds, what do you do? How you sell equities? I just put them on hold from my link, my demat to the brokerage account, which it already is. Just press sell, and that's it. You're done. Same. Okay. Okay. That one-click buy, one-click sell. Money comes directly. Since it is a, and then you can withdraw money the way you can do in equity market. Okay. Fantastic.
So, then I have to ask about the transaction cost. And, you know, and we know that all of this is is in demat. There's no physical certificate. There's nothing. Nothing in physical. Everything is in demat format. Transaction costs? Absolutely zero from your side. But exchange cost, stamp duty, transaction tax, or this is such an immaterial thing. It is sometimes, if you are buying 1 lakh rupees, it is hardly one or two rupees or 5 rupees. It doesn't matter at all. Okay. And that is whatever the exchange charges is something. But it is hardly anything. Hardly anything. From your side, you don't have any transaction cost as of now. Nothing. You plan to charge them maybe going forward as your platform becomes bigger and bigger, or not really? Okay. Not required actually.
Now, let's get into the whole outlook part. Where we are, what's your view? Because for someone who's been in the bond market for such a long time, this is an interesting place where we are, right? Because interest rates are longer, you know, whatever higher for longer, or whatever you want to call it. We know it will fall. But entire 2024, people thought interest rates will fall, will get cut. US has started. India. What's your view?
So, this, you are not talking from the retail perspective, right? No, no, no. I'm talking general. General. Yeah. Look at it as, you know, like in equity market, you have Nifty targets and Sensex targets. Debt market. See, first thing is, I think, you know, let me go back and try to give you some background that where we are as a country and what can happen and, you know, what should happen. So, these are two different things, right? Sometimes what you say that in the equity market also, it should ultimately go to or rise 20% or become. But today, in next three months, what is going to happen? It is anybody's guess, right? Something. The bond market is also similar, right? Sometimes. So, in case of India and US, you talk about the US. The interest differential used to be closer to, let's say, 3 and a half to 4%. Means US 10 year, if it is at today, it is around 4.60, 4.70, something like that. Then India should be closer to 8%. Correct. Yeah. But where we are today? 6.8. And they are at 4.5 or less than 4.
They are 4.64. It means 2%. Ah, okay. It is one of the lowest interest differentials which we are doing. What is interest rate differential? It is basically because US is more safe, inflation is lower there. The inflation target is 2%. India inflation is 4 to 6% or something like that. Yeah, correct. So, India actually, the interest rate has not gone up when the interest rate was going up in the US. So, that is the first thing. Okay. If there is a differential is less, then it is less attractive for the international investor to invest in the Indian bond market. M. That is one problem. Second problem is Indian companies will not go overseas to borrow money because in India interest is cheaper than overseas. It means Forex is also not coming in India. Yeah, there's a capital market problem, right? And if the money is not coming in India, it means currency will depreciate faster, which is actually happening, which is actually happening now. Yeah, right. Actually, you're surprised that the currency depreciation is in the range of 4% for the last three years because the interest rate differential has come down. So, that is the first thing.
Now, second thing, second part of the problem is that, of course, the GDP growth is compromised. We all know the GDP growth is coming. We don't know why. You know, governance change, he has done an amazing job, correct? But, you know, by design, you think that if you reduce the interest rate, the GDP growth will go up. I don't think so. Okay. Okay. But the problem, larger problem is most of the banks, if you see that deposit growth is falling like anything. People are not saving enough. The saving ratio is coming down. So, if you reduce interest rate further, people will be more prone to get into risky assets of equity or something to make more money, and they won't have money for. Then banks will not have any money to bring in, which is already a case. If you see in the, the deposit growth of even the large bank of HDFC, they are struggling to get money. In certain banks, the deposit growth is almost like zero, even after offering reduced interest rate. So, in my view, personally, you ask, even if RBI reduces rate by 25 to 50 basis rates, actual rates will not come up. Transmission, um, transmission, it has, it should not come out because the demand per se will not be there. So, second thing is we are talking about US, right? The rates have, they reduced the rate by almost 100 basis points or more than that. But what happened? The rate was 3.6. US 10 year, they reduced rate by 100 basis points, rate has gone up by 100 basis points. M. So, just by reducing rate, the transmission will not happen. It's ultimately a game of demand and supply also. So, my view is RBI will reduce the rate. They may, because, you know, sometimes there are different types of things, but rates will come down. No. Okay. Okay. Very interesting.
So, now, just to wrap the entire episode, what is your advice to someone who's looking to invest in bonds for the very first time? You know, and how should he approach his portfolio? Now, asset allocation, let's leave out the equity part. Let's look at the debt part. Like, what would your advice be? Gathering, where should I invest? What's looking good for someone who's brand new into bonds? How do you think he should look at making a long-term portfolio in bonds? See, first thing is, uh, you know, take a first step, which is, you know, just have a target yield of 10%. Buy. Start the journey. Somebody has told you that, uh, you know, first buy the bond. There are certain bonds that are available. If you have a target yield of 10%, you will get a 10% bond. Okay. That is the start point. Okay. This is where, you know, I start investing in the bonds. Your first experience will be that, you know, the interest and principal is coming directly on a bank account. You will get some experience that how it is working. Second experience is that you will be able to sell the bonds. That's the second thing. Once you will have this experience, you will start selecting bonds on your own. Okay. You are start building the portfolio. The biggest realization for you will be that, you know, uh, which is the experience as compared to FD. If you're getting 5 to 7% higher returns, it means that every year, even if there is a 5% NPA in my portfolio, I can afford that. One second thing is suddenly you will realize that you, you always talk about weighted average yield in your portfolio. Equity, something that just by bonds, you are reducing your risk and increasing returns. Suddenly, you realize that even part of your equity portfolio, you can start shifting into bond market because some part is it will become an interesting exercise for you. But it's a journey. In the journey, my suggestion is, first, just allocate 5% of your portfolio into bonds. Buy bonds and experience two, three things that you can sell also.
Okay. Now, once I've crossed that threshold, then what do you think is, is looking good right now to you? Like, would you say, you know, corporate, la? So, I'm looking at both sides, right? I always, I always a fan of goal-based investment. Okay. When I say goal-based, how it works? Basically, you know, you are in the age of, let's say, 55, 56, 57. I will suggest you buy a deep discount government bonds, okay? Because in interest is payable on the government, uh, on the bonds when actually you receive it. So, if you're buying deep discount after the retirement, you will get all the interest, right? And during your earning years, you may be paying 30% or 40% tax. After the retirement, tax, by design, it comes down, right? Because that one, so it's a huge advantage. Suggest rather than planning some pension or something. So, that is one way. Okay. One goal. Second is, you know, you are right now in the age of 40, 45. You are paying 40% tax or something like. Buy tax-free bonds available at 5.6, 5.7%. Pre-tax return is almost like 9%. You don't want to get, you know, bothered about, because you are too much busy. And if you are already in 40% tax bracket, buy tax-free bonds. And the tenure on them is still 10 years. Four to five years is pending. Is still there. Still there. So, you are paying 40% tax, you are well to do in your job. Just focus on, you know, building your portfolio in a particular manner. Don't take something like that. Yeah. You are planning to buy, you are planning a vacation, right? Uh, Jazzy vacation or something like that. So, you have to save for one year. Buy 12% or type of bonds. Some risk is there. Yeah. But return is pretty high. And risk is also very manageable. Okay. Save money for. Because suddenly you are earning 5 to 7% more. Yeah. Right. After one year, sell all the bonds. The huge money is there. And you can plan your vacation. The same thing is applicable for house. You can try 9 to 10% bonds because it's a much more safer money. Sure. So, I always suggest is that, you know, your goal should be very clear in your mind. Bond market gives you flexibility of each and everything. And that's the advantage of bond market. There are so much products, so many things are available that if you are clear about your goal, somebody can advise you. If actually he wants to give you right advice, he will advise you which bonds to buy, which will suit you best. Yeah. And it meets your requirement. Very folks, as usual, at disclaimer, please do your own research before buying. Uh, Sur's recommendations were generic in nature. He's just pointing you towards how how you can plan your investments in a goal-based way. Please don't take them as specific recommendations to go and buy anything you want. So, absolutely. Please always do your research on Research consultant advisor. Okay.
Sur, we're done with the show. Uh, we have a standard question in the end for all our guests. You know, any content, any book that you're reading that you'd like to recommend to our audience? Ah, see, throughout my life, my career, I was, of course, I am an avid reader. Okay. So, whenever I get into, fortunately, I got an opportunity to get into various businesses, we different type of businesses. I read a lot about research reports, our content on the website, and all the things. And the best readings for me is when I can apply them practically. Okay. The learning is pretty high. Okay. So, I always suggested whenever you are getting into anything, read a lot of literature about that one. There may be books, there may be literature on the thing. And once you are doing a practical application of that one, the understanding is pretty high. Yeah. Yeah. So, but one of the book which I always like is about Mahabharata. Very interesting. And that always, uh, inspires me for various other things. But otherwise also, read lot of lot of things. The classic text, you're saying of the Mahabharata. Yeah. Folks, like I said, there is a lot of material out there, books and resources. Uh, there's Bondwala on Bond Bazar, doin, and everything else. And those are really the books, the material, the resources that you should be reading before investing in bonds. But that's it. That's a wrap on this this episode of PESA. My guest Sur D founder Bor brother. Sur, thank you so much for for our audience. Thanks. Thanks Anam. Thanks a lot for this amazing discussion. Great to have you here. Thank you. Thank you. I v m.