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Reenita Malhotra Hora

As we approach the holiday season, I find myself on a mission to invest for next year rather than simply go shopping.
I have begun to pester my investment adviser about mutual funds in India. Why? For the simple reason that in the last couple of months, global fund managers have started their first Indian corporate bond mutual funds.
JPMorgan Asset Management India’s Corporate Debt Opportunities Fund and Deutsche Asset Management India’s DWS Corporate Debt Opportunities Fund are just two of the players in the market.
But historically there hasn’t been a real market for corporate debt in India. So why now?
Nandkumar Surti, CEO of JP Morgan Asset Management India, says it’s because in the past interest rate swings have been too high for secondary market trading for corporate bonds. That and the fact that money market rates have yielded 9 per cent to 10 per cent returns have led investors to think “why bother with corporate bonds?”
But financial analysts will tell you that credit risk in India has dropped thanks to Prime Minister Narendra Modi’s bid to revive the economy. Bloomberg says the risk of Indian companies reneging on their debt has fallen to a three-year low.
Surti doesn’t necessarily agree.
“Default rates have been reasonable, in line with what you will see throughout the world. Credit itself has not been a challenge for investors; higher credit risk has been more dictated by government policies.”
So here’s a snapshot of what the Indian economy looks like right now:
India’s benchmark Sensex Index of shares has surged 25 per cent this year, the most in Asia. Analysts are saying that the Sensex could double or even triple five years from now when the new government completes its term. Gross domestic product increased 5.7 per cent from a year earlier in the April-June quarter. The Reserve Bank of India predicts the pace of expansion will accelerate to 5.5 per cent in the fiscal year ending March next year. That’s roughly half a per cent up from the previous year.
Investors are wildly optimistic that Modi’s new government will cut red tape and boost investment in an economy growing at its fastest pace in more than two years. “The simple story in Asia remains India,” said Christopher Wood of CLSA. “That’s what I have been most positive on the last year and that’s what I will remain most positive on over the next four years.” 
Corporate bond yields in India are among the highest in the region, with five-year AAA notes paying an average 9.35 per cent. Compare this to a 5.21 per cent yield in China.
With signs of revival in the economy, clearly corporates are best placed to benefit but you might ask the appeal of investing in mutual funds rather directly in corporate issuances. “Asset management companies bring in a certain amount of expertise especially when you are dealing with non-AA rated bonds,” says Surti. “Also, if you are looking to make trading gains with direct investments it’s a full time activity for individual investors.” 
I couldn’t agree more – unless you are a seasoned bond investor or unless you are planning to hold the bond to maturity (and even then you really need to know the company and make sure it is not likely to default) active buying and selling can be a nightmare.
The good news is that you can easily invest in India’s corporate bond mutual funds through the investment arm of your local bank. And according to Pierre-Yves Bareau, the London-based head of emerging-market debt at JP Morgan Asset Management, as US borrowing costs start to climb, Indian bonds are likely to be among the best performers in emerging markets.


Time to invest in Indian Corporate Bond mutual funds?

Global fund managers have started their first Indian corporate bond mutual funds in the last couple of months.  Photo: Reuters

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