Debt market refers to financial market. You can buy and sell debt securities in form of bonds. These markets are important source of funds to develop India. Probably, India debt market is one of largest in Asia. It is useful to banking channels for finance. Check on debt market vs. equity market.
What is Debt Market
Debt Market consists of bond markets. Because, it trade fixed income instruments. Therefore, fixed income instruments must be securities. And these securities are issued by Governments. Such as Central and State, Municipal Corporation and Govt. Bodies. It also issued by private entities like financial institutions, bank, corporate etc. Read features of debt instruments.
However, it provides financing through issuance of bonds. You can trade bonds and debentures in this market. Moreover, these instruments can be traded in OTC or exchange traded markets. In India, debt market is divided into two parts. Such as government securities and corporate bond market.
So returns are risk free. As per above, debt market return are fixed. Therefore, buyer is giving loan to seller at fixed interest rate. Hence, it equals to coupon rate. You can view different types of Debt market instrument.
Maturity in Debt Market
However, tenure for maturity of an instrument from 1 to 30 year. Generally, if you have maturity for longer period. You will receive higher interest rate on instrument. And issuer will repaid principal amount on maturity date. Hence, short term instruments with maturity less than 364 days.
Classification of Debt Market
Debt market is place where debt securities are buying and sell. It serves as useful source for banking channels. To meet their financial requirements. You can earn interest on money lent by you. Therefore, these instruments provide higher returns. Hence, debt market can be classified into two categories. Such as Government Securities Market and corporate bond market.
Government Securities Market
Government needs huge amount. And to perform various functions. Such as to keep Law and order, justice, national defense, banks so on. For this it generates revenue by various ways. Like form of taxes and income from asset ownership. And also it borrows from banks and other financial institutions. Check list of government securities.
One of important sources of borrowing funds is GSM. Probably, government raises short and long term funds. And these securities do not carry risk. Moreover, it gives guarantees on interest and repayment of principal. Hence, it is benchmark for other markets. Therefore, it referred as gilt edged securities.
However, Government securities are issued. By central, state and semi government. Government securities are of two types. Such as treasury bills and government dated securities. Therefore major investors in this market are bank. See features of Government securities market.
Corporate Bond Market
Corporate bonds are issued by companies to raise more capital. Therefore this money is used to reinvest in their operations. Because for expansion, modernization, restructuring and merging. But corporate debt market is market where debts corporate are traded. See corporate bond list
If you hold maturity bond. Hence, you will receive principal and sum of interest amount. However, if you sell bond before maturity. You will not get same price back that you paid. Because, if your bond value will drop if interest rates on other bond go up. Thus, higher risk gives higher return.
However, financial institutions, insurance companies and MF are investors. And it is long and expensive procedure. In this market selling bonds much easier. And provides quicker way to raise capital for corporate. You can buy bonds individually or through financial adviser. You can view advantages of corporate bonds.
In Indian debt market is assured returns. And it is biggest advantage of investing in debt market. Moreover, market offer risk free returns. However, it says that return is almost assured. Apart from this government securities are safer.
On other hand, there are certain amounts of risk in corporate. Therefore, you can take help from credit rating agencies. Probably, interest may vary depending upon rating. Another advantage of investing in Indian debt market. That is its liquidity is high. You can take loans against government securities.
And bank offer easy loans to investor. You make all decisions. Once you repay full loan then business relationship end. Therefore amount you pay in interest is tax deductable. And it reduce you net obligation.
In addition, you need to know in advance. That how much interest and principal will pay every month. Because, this makes it easier to make financial plan.
As there are several advantages in debt market. You can see certain disadvantages also. In debt market returns are risk free. But that are not as high as equity market at same time. So, at one hand you are getting assured returns. But on other hand you are getting less return at same time.
Finally, bonds offer safe to stock investment. Therefore debt instruments are very secured form of saving. And it has high rate of interest. Moreover, they secured because they are issued by governments. As above, short term funds give higher rate returns.