Abhenav has always thought differently, and is often at the forefront of new ideas - traits that have helped him build a sharply differentiated and successful advisory practice, at this young age. This young and active Kolkata based FIFA member shares some thought-provoking insights in this article on how you can build an incremental business vertical with bonds, by targeting a segment of investors who don't go towards debt funds, for various reasons. Read on as he shares his thoughts on this business idea as well as how he thinks this idea can be taken forward by like minded IFAs collectively to really put an icing on the cake - for investors as well as for yourselves.

When we think of fixed income, our thoughts instantly go towards debt funds and company deposits, and we usually recommend either of these, based on the risk profile, tax status and requirements of individual investors. There is another area of the fixed income market, which I think is still largely unexploited - which represents another growth vertical for all IFAs - and that's bonds. I am not just talking about tax free bonds - I am talking of regular company bond issuances and how we can be active in the primary as well as secondary market in order to add more value to our clients and create an additional income stream for ourselves.

Who are our target investors?

There is a set of investors who do not go towards debt funds and who are therefore offered company deposits as an alternative. These could be :

• Trusts, charities, schools etc who enjoy some tax breaks on their income and who need very predictable cash flows to run their institutions

• Senior and very senior citizens - who have a Rs. 250,000 and Rs. 500,000 tax exemption limit and therefore can go for higher coupon fixed income instruments without worrying too much about the tax incidence. I have created bond portfolios of Rs. 25 lakhs to Rs. 50 lakhs each for several senior citizens, depending on the level of their tax exemptions.

• Investors who simply do not want the variable returns from bond funds and prefer a fixed interest, regardless of the tax incidence. We all have seen a number of HNIs who continue to prefer bank deposits for this reason.

Why bonds?

If we compare bonds vs company deposits, bonds score on 3 counts, from an investor's perspective :

1. Lock into longer tenure : Company bond issuances are usually longer tenure - between 5 to 10 years, whereas fixed deposits are 1-3 years. An investor has an opportunity to lock into higher yields for a longer period of time - which, in an environment of gradually declining yields, is a big plus. There are many bond issues which offer either the same coupon as the FD program or sometimes higher. Jyoti Structures for example is offering 14% on their long term bonds while the 3 year FD fetches 12.5%. We keep looking for such interest arbitrage opportunities, and when we find them and offer them to our clients, they are happy with the efforts we take to get them better yields than most other intermediaries. This helps strengthen the relationship.

2. Liquidity : Compared to a company FD, bonds are more liquid, as they are traded on the exchanges. However, volumes are still low and selling large lots continues to be a challenge. I do have some thoughts on how we can improve this - but, let me share this a little later.

3. Quality of issues : We get very strong companies with high credit ratings issuing bonds. Many of these companies are not present in the FD market. So, if you are looking for high quality names, bonds may offer you more options than FDs.

Simple decision making process

Unlike fixed income funds, where we sometimes see protracted discussions on portfolio characteristics of several funds, outlook on duration, accrual strategies etc, when it comes to bonds, we find much larger amounts get invested much quicker, through a very simple analysis process. It all boils down to only 3 things - who is the issuer, what's the tenure and what's the coupon. Once the investor is comfortable with these 3 parameters, investment decisions - often of substantial amounts - are taken very quickly. From the point of view of productivity of our time, that's a big plus. When it comes to fixed income funds though, the discussions are much longer, and due to the relatively higher number of variables that the investor is not familiar with, the amounts allocated will also be naturally relatively lower.

The key to this business is the secondary market

I mentioned earlier that liquidity is currently a challenge. Though bonds are listed, trading volumes are quite thin and erratic and large retail lots can disrupt prices significantly. On the other hand, when you look at the institutional market, it is very liquid - and continues to be traded over the phone by a handful of active bond market brokers. Large lots change hands, when routed through these active bond brokers. Here is where I think we can create an opportunity for our clients and ourselves, if we think a little differently.

If a few IFAs from each city, who target the kind of clients I mentioned, are able to talk to each other more often, we can exchange information of demand and supply of bonds from our own client bases. As more of us get active, we will be able to match trades and effectively create liquidity for these bonds, without waiting for RBI and the Government to do their bit on enhancing retail interest in secondary bond markets - which they have been looking at doing for quite some time now.

I know some of you may think that this is an idea ahead of its time - but just think about it. If we can create liquidity for bonds, look at the value proposition we can now offer our clients. Especially in a world where we always run a risk of income funds business going direct given the differential NAVs, we need to come up with propositions where we are actually adding value to our clients.

Earnings can be quite healthy

As we collectively become more successful in creating some sort of liquidity which provides great comfort for our clients, we are actually helping ourselves too. The revenue streams from such a proposition can be from three ways :

1. Upfront commission from the issuer at the time when your investor subscribes to the issue

2. A fee that you charge your client for locating a buyer for the bonds he wants to offload - you can call this a placement fee

3. The difference between the bid and offer prices for the bonds in the secondary market that we collectively create will be split between the two intermediaries who bring the buyer and seller together for the transaction

To conclude

There is a healthy business stream we can build for ourselves by focusing on offering bonds to that segment of investors who don't go for debt funds, for various reasons. The more we get into bonds for this segment, the more we are differentiating ourselves from the plain-vanilla company FD brokers that may approach these investors.

The icing on the cake in this business vertical will come when we are able to work together to create liquidity for bonds through our own secondary market. There is a lot of work to be done on this front, but I think its worth getting started now.

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