Securitised Debt Instruments: Why Are Brokerages Being Bullish On SDIs?

The securitisation market in India is on the rise! Last fiscal year, it witnessed a whopping INR 1.8 lakh crore in volume, a big jump from the previous INR 1.35 lakh crore in FY22¹. This surge indicates investors' growing confidence in securitisation as a potent investment strategy.

Securitised Debt Instruments (SDIs) are financial securities formed by securitising individual debts, a process where assets are transformed into securities backed by those debts. These assets can encompass various types, such as home-equity loans, auto loans, and equipment leases. SDI owners earn income from these underlying assets and mortgages through this securitisation process. 

Brokerages have a positive outlook towards securitised debt instruments. They believe that the value of SDIs will likely increase in the future. So, let us dive into why brokerages are so bullish about these instruments.

5 Reasons Why Brokerages Are Being Bullish Over SDIs

Brokerages are experts in spotting promising investment avenues after assessing risk-reward potential, market sentiments, and economic indicators. Among the many investment options, they often go bullish over avenues exhibiting growth potential, reliability, and lower risk. Here are some reasons why brokerages are bullish about securitised debt instruments:

1. Diversification 
   Brokerages are bullish on securitised debt instruments because they can diversify investment portfolios. This is a smart move to reduce risks while earning good returns from a mix of investments.
   Furthermore, these days, inflation has risen above fixed deposit rates. While the inflation rate in 2022 was 6.67%², it hit a 15-month high of 7.44% in July 2023, closer to its previous high of 7.79% in April 2022³. Moreover, bank fixed deposits have yields ranging from 6.25 to 7.25%. So, many traditional investments are getting negative real returns. 
   This situation can seriously lead to wealth reduction instead of creation. Consequently, diversifying portfolios to non-stock market-linked instruments yielding higher returns could be promising.
   SDIs come into play here. Securitised debt instruments group small-ticket loans from various sources into a single package, allowing investments to be diversified across different products and geographic locations. The structure enables acquiring tranches that align with varying investment objectives, which can help lower risk because it is not all tied to just one investment potentially going wrong.
2. Reduced Credit Risk
   Brokerages consider government-guaranteed securitised debt instruments low-risk investments. This guarantee implies that investors will not bear the consequences if the issuing company encounters financial difficulties. 
   In the case of SDIs, the underlying asset ownership is transferred to a separate legal entity called a Special Purpose Vehicle (SPV), which protects the SDI from even the remotest chance of bankruptcy. This shields SDI investors and minimises credit risk.
   Contrarily, stocks lack such robust protection mechanisms and show high volatility. Since the onslaught of the COVID-19 pandemic, Indices have been showing volatility. Now, if the company you have bought shares of faces financial troubles, your investment's value could decline or become worthless. 
   This makes SDIs safer compared to stock markets in terms of credit risks.
3. Accessibility For Small Investors
   Securitised debt instruments are accessible to a wide range of investors. This includes even those who might not have a hefty amount of capital. This makes brokerages bullish on these instruments.
   If we look into traditional mortgage investments, they can be quite demanding. They require a significant upfront investment and often take years to see substantial returns. Moreover, many investment options regulated by the Securities and Exchange Board of India (SEBI) come with high entry barriers. This typically means you need a substantial investment amount or a considerable net worth.
   SDIs offer a unique opportunity for investors with limited capital to gain profits. It transforms groups of debts or assets into tradeable securities. This makes them liquid and accessible to a broader investor base. As a result, investors do not have to pay high initial costs and wait for long gestation periods to see the returns.
4. Feasibility And Reliability
   Brokerages consider securitised debt instruments reliable and practical. The structured nature of SDIs and the dependable assurance of consistent payments make brokerages bullish.
   The investment market is complicated with challenges like high inflation and unpredictability make it challenging for investors to maintain steady returns. This, in turn, can erode their purchasing power over time. 
   However, SDI investors get regular monthly payments. These payments include both interest and principal amounts. Initially, these payments are primarily made up of interest. But gradually, a mix of interest and more of your principal is coming back to you. It is a structured approach that aims to provide you with a consistent income stream over time.
5. Enhanced Credit Ratings
   When choosing where to invest, brokerages and individuals are inclined towards assets with good credit ratings. Why? These assets tend to offer investors a sense of security and stability. Securitised debt instruments stand out for their elevated creditworthiness, giving brokerages a positive outlook.
   SDIs are treated separately from their parent entities. This separation allows them to boast excellent credit ratings often. An SDI with a strong credit rating indicates a lower risk level. As a result, potential investors are more likely to consider it a viable investment option. This way, they try to minimise risk while aiming for consistent and higher returns.
   Further, with significant reasons for brokerages to be bullish over SDIs, their positive outlook can lead to optimism among more investors. The resultant risk-free perception of SDIs can eventually increase their demand. Potentially, this can drive up their prices and make them favourable investments in the eyes of brokerages and investors alike.
   Note that no investment is 100% free of risks. Despite being backed by tangible assets, SDIs carry risks. Defaults can happen, and that can affect the returns. And then, there is a scenario where homeowners decide to refinance their loans. This might lead to earlier-than-expected payouts to investors, ultimately affecting the returns.

Conclusion

Brokerages are bullish on securitised debt instruments (SDIs), which makes a lot of sense. They tick all the right boxes—diversification, reduced risk, solid credit ratings, accessibility, and reliability. Consider the potential advantages securitised debt instruments offer as you contemplate expanding and securing your investment portfolio. Visit Grip Invest to discover the potential of SDIs and take a step toward a diversified and secured investment future!

References:

1. CRISIL Ratings <https://www.crisilratings.com/en/home/newsroom/press-releases/2023/04/securitisation-volume-surges-33-percent-to-over-Rs-1-point-8-lakh-crore.html>
2. Statista <https://www.statista.com/statistics/271322/inflation-rate-in-india/>
3. CNBC TV18 <https://www.cnbctv18.com/economy/retail-inflation-rate-in-india-iip-cpi-data-17527381.htm>

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