Since the past four to five years, fixed income investors have been a miserable lot as they have been hit hard by extremely low interest rates over the past. However, this period has also seen the emergence of new-age digital platforms for alternative investments which allow investors earn double digit returns.
“For individual investors traditionally there have been two type of investment choices. One is FD or debt mutual fund and second has been an equity instrument. These are two very extreme investment choices. In debt MF or FD one can get around 4-7% and in equity the risk return would be around 12-18% depending upon large cap, mid cap and small cap exposure. There is large vacuum between these two extreme investment choices,” says Anshul Gupta, Co-Founder & CIO at Wint Wealth.
Here’s a look at how these new debt investment options work and who should invest in these?
What are the options
Grip (https://www.gripinvest.in)
Grip Invest is an alternative investment platform that provides retail investors with the option to make small ticket investments in physical assets that earn lease income such as vehicle fleet, laptop, warehouse, furniture, inventory. The annual return that it is currently offering on fixed income investment, which is monthly rental, is an average IRR of 21% which is almost equivalent to an absolute return of 11% annually.
These assets are financed only for a fixed period mostly in the range of 24 – 36 months during which investors get back their principal with the return. There is no midterm liquidity as your funds are locked in for the designated tenure during which you just receive the monthly rental.
“Grip facilitates people to come together, put in smaller cheques to own the asset and then earn returns. If you log in to our website, you will see there is an opportunity to lease X vehicle to Y company for a specific tenure and earn a fixed rental on a monthly basis. You do not have to do anything apart from investing as rest everything including operational part is taken care by Grip,” says Nikhil Aggarwal, Founder & CEO Grip Invest.
“We do not tell you where to invest but we present to you various options to invest. You can start investing with Rs 20,000 per investment. We are looking at getting a 20% pretax IRR on these investments. At the end of the lease these assets will be sold at their residual value that will also come back to investors,” says Aggarwal.
The revenue model of Grip depends upon charging a fee to both the investor and the debt issuer. “As a business model we charge a 1% as processing fee to Lessee, the company which wants to take the vehicle on lease. And we charge our investors 2% of the return that they earn every month,” says Aggarwal.
A promise to high return cannot come without an element of risk. “What we want to do is to reduce the capital outstanding in such a way that at any point of time capital outstanding with the lessee is less than the recoverable asset. If after 3 years the asset value available is only 20%, we want to ensure that more than 80% of the returns have already been given to investors. So even in the worst-case scenario at the end of the lease when you have to recover the asset and sit in the open market then at that 20% value you are still covered,” says Aggarwal.
Wint Wealth (https://www.wintwealth.com)
Formerly known as GrowFix, Wint Wealth is India’s first alternate debt asset platform for retail investors and has crossed an AUM of Rs 100 crores within 18 months of its incorporation. With the launch of ‘Wint Bricks Nov21’ it has become the first Indian fintech to bring senior secured bond based public issues for retail investors. These are public issues where a corporate seeking funds issues its bond exclusively on the concerned platform to collect funds from retail investors. Retail investors can invest in fixed income assets with a minimum of Rs 10,000.
When it comes to investing in bonds most investors have been preferring the AAA and AA categories and offer similar return as bank FDs. “The moment you come to category A the risk increases incrementally but returns increases drastically,” says Anshul Gupta, Co-Founder & CIO at Wint Wealth.
Wint has focused mostly on category A (Credit Rating) senior secured bonds. “Within this rating category we do our own due diligence on the entity. We have our own filters as we look at entity’s systems, operations, processes, financial health etc. and even do branch visits and physical audits. Only those entity which clears these filters we onboard on our platform and then structure the deal for the entity. It’s not an open platform where any A rated entity can issue its bonds. Neither do we buy from market a bond which is already issued,” says Gupta.
A double digit return from a fixed income instrument is what many investors wish for and this is where this platform of A rated bonds tries to fill the gap. “On our platform we offer bonds issues with private entities where the rate of the returns is 9-11%. Beyond 11% we think would be too risky, so we do not deal in those segments. From rating perspectives these are mostly A rated bonds,” says Gupta.
By focusing only on few segments to lend Wint is betting on its risk management skill to create value for investors. “We like NBFC where leverage is low. If you look at the regulation RBI allows NBFCs to operate at a leverage of 6-7 times of their equity capital. Lower is the leverage higher is the margin of safety for us. Most of our NBFCs will have leverage less than 3 times and they will be operating in retail granular customer segments and in secured segment,” says Gupta.
As far as risk management is concerned it has so far has not faced any headwinds. “Our first transaction happened in August 2020 since they we have face no defaults and no downgrades. Our first deal has already matured, and 100% money has been returned. Our second and third transactions will mature in June 2022 and that is also performing well,” says Gupta.
KredX (https://www.kredx.com)
The KredX platform acts as a marketplace where investors can select the required number of units and invest from a list of corporate bonds available on the platform. It offers various kinds of Bonds including ones issued by corporates, government bodies, PSUs, banks and other financial institutions. These bonds are fixed coupon rate bonds, floating coupon rate bonds, etc. It also offer bonds coming for secondary sales.
It also has an invoice discounting platform which typically comes with a tenure of 30-90 days. Retail investors can buy either a part of the invoices or the entire set. The process is entirely online right from KYC to investment. In the case of invoice discounting, investors can expect an annualised return between 10% to 15%. Meanwhile, the expected returns on bonds vary from 7% for secured bonds to 12% depending on the rating of the bonds.
The average investment holding period on the KredX platform for invoice discounting is 15 to 90 days. On the other hand, in the case of bonds, an investor can either hold them till maturity or sell it in the secondary market as per their convenience.
While the minimum investment limit for invoice discounting is Rs 3 lakh, there is no upper cap whereas in the case of bonds, the minimum and maximum amount of investment varies depending on the bond’s unit price. One can invest even a smaller amount of Rs 1 lakh in bonds and can sell these bonds whenever they want to.
“We have not witnessed any default rate on the corporate bonds sold on the KredX platform so far. The default rate for invoice discounting has also been minimal on our platform which is close to 0.04% of the total invoices we have discounted,” says Manish Kumar – Founder and CEO – KredX.
What should you do?
Do keep in mind that when it comes to regulation these new age platforms lack any regulatory supervision and works within the overall framework of contract law and company law. So, it is mostly investors be aware scenario.
Now, what should an investor do? There are various advantages of these new age investment platforms as these are professionally managed, have high level of transparency in their operation, they keep the cost low and offer convenience.
However, these options come with inherent high risk associated with high return investment. Another limitation is that the most of these investments lack liquidity as your funds are locked in for the entire tenure and there is no midway exit option.
In case of default the collection and recovery process of these entities haven’t been tested and it will take time before a track record is built. This area is still not tightly regulated and hence, it is suitable only for savvy investors who understand the risk-return dynamics.
Many investors looking for high return on fixed income may find the return attractive. However, the high return does not come without an element of high risk. Conservative investors, especially senior citizens, should not consider these options as replacement of fixed deposit or government bonds which are relatively much safer. Therefore, investors need to do their own due diligence before going ahead with the investment and invest only according to their risk appetite.
If you have a high-risk appetite and are ready to invest, you should make sure that there is proper diversification.
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