Investors Seek Alternative Yield Options in Structured Credit and REITs

Investors Seek Stable Returns Amidst Changing Interest-Rate Expectations and Volatility

Wealth managers and fund executives are increasingly pitching a mix of income-generating products to investors seeking stable returns and tax efficiency. At the Moneycontrol Dezerv Wealth Summit in Bengaluru, industry experts discussed where investors should look for yield amidst changing interest-rate expectations, geopolitical uncertainty, and volatile bond markets.

Fixed Income Remains Relevant

Anupam Joshi, co-head of fixed income at HDFC Asset Management Company, emphasized that traditional fixed income continues to remain relevant due to its liquidity and stability. Despite several debt fund categories losing their earlier tax benefits, debt mutual funds still offer investors the ability to defer taxation until redemption, making them useful for long-term financial planning and retirement-oriented investing.

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Debt mutual funds have tax advantages in certain categories, such as income-plus-arbitrage products, where taxation can fall to 12.5% if held for more than two years. Joshi believes that the current environment favors shorter-duration strategies due to uncertainty around inflation, crude oil prices, and global geopolitics. He recommends investing in shorter-duration products, such as those with durations up to one year or one-to-three-year duration-oriented products.

Long-Term Bond Yields Near Historical Lows

Long-term bond yields have corrected sharply and are nearing levels seen after the outbreak of the Russia-Ukraine war in 2022. Joshi noted that bond yields have continued to rise despite RBI rate cuts over the past year. Since the last rate cut in June 2022, yields have risen by anywhere between 75 to 100 basis points over the last one to one-and-a-half years.

Joshi added that the Reserve Bank of India could raise rates by another 75-100 basis points over the next four to six quarters if inflation pressures remain elevated.

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Comparison of Fixed Income Products

Hybrid and Structured Products Gain Popularity

Niranjan Avasthi of Edelweiss Asset Management said investors are increasingly turning to hybrid and structured products for fixed-income-like returns with better tax efficiency. Avasthi referred to arbitrage funds, equity savings funds, and Specialized Investment Funds (SIFs) as providing fixed-income-like risk-return profiles in a more tax-efficient way.

Avasthi called SIFs a bridge between mutual funds and PMS/AIF products, combining the transparency of mutual funds with greater flexibility in portfolio construction. Income-oriented SIFs and hybrid products can play a role across investor categories, including retirees looking for regular cash flows.

Structured Credit and REIT-Like Products Gain Traction

Susmit Patodia of Dezerv Wealth spoke about the growing investor appetite for structured credit and REIT-like products, especially among HNIs and family offices. The structured credit market and the InvIT-REIT market in India are currently about $30 billion each, with appetite rising sharply over the last three to four years.

Structured credit products currently offer yields ranging from 11% to 16%, depending on the level of credit risk investors are willing to take. However, the India's InvIT and REIT market remains relatively underpenetrated, with only around 9 lakh investors currently participating in the segment.

REIT Market to Remain Strong

Mayank Saxena, CEO, Anarock, explained that REITs are gradually changing how investors approach real estate ownership. He noted that holding an asset physically is passing, and investors need to hold their assets in a paper form. India's REIT market is still at an early stage, with only a handful of listed REIT products currently available.

Bengaluru, Pune, and Hyderabad continue to remain attractive rental markets despite concerns around layoffs in the technology sector. Saxena added that sectors such as student housing, healthcare, and residential real estate could eventually see REIT participation.