But their yield levels are higher than that of debt MF portfolios
In the context of investing in bonds / debentures, the risk level of getting or not getting your money back in time is perceived through the credit rating. In most cases, yield level in the secondary market varies from one bond to another, in the same rating category. Yield level is the annualised return you will get, provided you hold the bond till maturity. The significance of yield level being different, even for the same credit rating, is that the market assigns different risk levels to various bonds. The market in this case comprises the ‘big boys’ i.e. banks, insurance companies, mutual funds, corporate treasuries, etc.
What are the avenues for you to invest in bonds? You may either purchase for yourself through a broker, or go through an investment vehicle. The investment vehicles are mutual funds, portfolio management services (PMSs) and alternative investment funds (AIFs). In PMS, the mandated minimum investment amount is Rs 50 lakh, or it could be even higher if the service provider sets it higher. In AIFs, the mandated minimum amount is Rs 1 crore.
Mutual funds are for everyone; retail investors to HNIs to large corporates. There are bond houses who purchase in bulk and down-sell to individuals in not-so-large lots. In today’s age of digitalisation and online availability, bonds are available on certain websites in reasonable lot sizes.
In bonds, higher the yield at which you are investing, the higher is your returns. In a vehicle like a mutual fund, there is a NAV declared every day at market based prices. Hence, there is no commitment that the yield of the mutual fund portfolio will be delivered. But it is a proxy for your expected returns. Mutual funds, being meant for retail investors though large investors and corporates take part, take limited credit risk in the portfolio.
Higher credit risk
Broadly, the portfolio yield of debt MFs would be in the 7-8.5% range, depending on credit quality. There are many bonds, debentures available in the market, with yield level higher than this, say 9% to double digits. This is referred to in the market as performing credits, but the risk level also is higher. You may avail of performing credit through PMSs and AIFs. Provided you have the appetite for higher credit risk, you may go through a fund house that has a proven track record of managing credits.
In search for net-of-tax higher returns in debt investments, a section of investors are inclining towards performing credits. Bonds with relatively higher yields being available online with certain houses, say 10% or 12% against a AAA rated PSU bond at say 7.6%, it is easier to execute even without having the minimum quantum for PMSs or AIFs.
Corporate health is better than earlier and growth is back in the economy, post Covid. Only aspect to be borne in mind, since the credit rating of the performing credit exposures would be less than AAA, you need to have understanding and appreciation of what you are getting into.
Source: https://www.financialexpress.com/money/your-money-performing-credits-carry-higher-risks-3238763/