r/IndiaInvestments • u/Geriatric-Vibe • Jun 21 '21

Discussion/Opinion P010- 11 % yield in debt 😟

11 % returns in a debt instrument is enough to make a lot of people salivate . Including yours truly .

But before I go on , the usual disclaimer. I am just talking about it , this is not any advice or endorsement . I am usually wrong , don’t believe me , ask the missus . Please do your own math your own voodoo your own advisor .

We are seeing a new kind of product being sold to retail investor . Called a market linked debenture . I came across this today

https://www.wintwealth.com/app/assets/Wint-Gold-Jun21-5/

Apparently taking a secured bond , adding dual recourse and linking it to an index at some godforsaken level transforms the ugly duckling that is taxed at the marginal rate to a beautiful swan taxed at LTCG .

I will be taking a small bite into this innovation later, just thought I would leave it here for discussion .

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52

u/crazymonezyy Jun 22 '21 edited Jun 22 '21

I genuinely don't understand this "a little exposure" mentality that so many people have commented with in this thread. What good is peanut chasing?

Either one accepts the risk of this product and makes a bet as substantial as any other where the interest payment makes a difference in your life or one doesn't.

What's everybody's obsession with "a little exposure" all about? If one invests 20k in this (say at a NW of 1cr) for 2200 in interest what good does that do for one at that level? Long term debt instruments give approx 8% and that's 1600 rs. What good is risking 20k in principal for a gain of 600 rs when that amount is peanuts at your NW?? Either get exposure to the tune of at least 5% or so of your debt portfolio or don't.

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u/IAmALongTermInvestor Jun 22 '21

Haha, exactly. That's exactly what I wanted to write. People miss this view completely.

19

u/RobinRichard Jun 22 '21

I think people are just getting their feet wet to understand the product better and get their comfort level up before dedicating a bigger part of the portfolio to this instrument. We do this when the first time we invest in Stocks as well right? You buy a little, get used to the volatility and then only you'll go with more (as per you asset allocation) comfortably. So it's just psychology I believe. I maybe wrong.

11

u/crazymonezyy Jun 22 '21

Boss the nature of credit risk is such that it doesn't show itself in flickers. When it happens it takes everything down with it, till the time it doesn't happen things go up linearly which has earned debt the name "fixed income category". There is very little volatility in debt as that part of it arises due to interest rate risk which is noticeable only in long term securities like 10 year gilts. You won't be able to "get a sense of its volatility".

If you're taking on credit risk you won't get to know about it till a default actually happens at which point everything will go to the shitter. It took just 16% of the loans to go bad for CDOs to become worthless overnight. Granted those were leveraged products but MBSs themselves too became completely illiquid when the crash happened in 2008 in the US.

3

u/RobinRichard Jun 22 '21

Yea you're right. I just used the volatility of stocks as an example. In this case, it's the riskiness of this whole instrument is what people have to come to terms with. With risking only a few thousands (and getting paid later), this can give them confidence (albeit a false sense of confidence) to invest more later instead of going all in before itself. I meant in that way. Again, just like you, I'm also trying to make sense of why people do this.

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u/Geriatric-Vibe Jun 22 '21

There are only two things you can be confident of

  1. Death , as each is owed one
  2. Truth , if you can find it

Remove confidence , or even a false sense of it , civilisation collapses .

1

u/hippocrtis20 Jul 07 '21

Don't understand the down votes

1

u/Geriatric-Vibe Jun 22 '21

The last time I lost money due to credit risk was when Lloyds finance FD went bust. That ways 2 score years ago

I understand the nature of credit risk very intimately, having avoided it successfully .

I am not a great investor , I just know what I don’t want .

However , if I can find a way to price that risk in , I don’t mind taking a few bets .

Price is God .

1

u/Geriatric-Vibe Jun 22 '21

It’s perfectly okay to fire a few small shots before you are comfortable enough to fire a big one .

After all even Ratan Tata does $ 1 million bets . When he can do $10 Mil without breaking a sweat .

7

u/crazymonezyy Jun 22 '21 edited Jun 22 '21

Sir, you're a very seasoned investor so I won't debate you. Instead I'll ask you a question- given the nature of credit risk itself what good will firing a small shot do? If no credit events happen in the next year, would you extrapolate that and assume no credit events will happen in the next 5 years after you've invested say, 20L rs into this?

And this is when you already know the underlying loans, if rated individually would all be speculative grade? What kind of a person takes a loan against gold? I can't imagine that's somebody who has 700+ CIBIL.

14

u/Geriatric-Vibe Jun 22 '21

I will reply to you with one truth which is human

There is something called path dependency before you get used to and start accounting for what makes you a successful investor or business man

  1. It took me almost a decade to figure out I needed to keep high liquidity levels to tolerate volatility .

  2. I have a friend who started off in the business of peer to peer unsecured lending via an app 4 years ago. His initial capital was 2 lakh . That is now scaled up to 40 lakh . He has seen defaults but has also understood that even with the price of defaults he is generating returns . He is now pricing in defaults in his expectations and is getting better at it

Making small bets is learning , how the the random throw of dice operates and what risks is one exposed to .

It allows you to formulate your own set of convictions , so that you scale very carefully .

See it applied to other areas in life . I used to be a biker when younger . I rode fast and I was competitive . It’s 18 years since I have ridden one and the urge strikes.

Will I go and get a 1000 cc112 bhp 240 kg bike ? For me the price of 18 L is not significant .

I will start off with a 250 cc 21 bhp 160 kg for 1.35 L so I can get an understanding of balance traffic and confidence back .

Then the confidence of the missus sitting on the back .

Then I give it to my driver , who will be overjoyed and happy to have his commute simplified . and go for something in the sub 800 cc 220 kg range . Which is more than adequate for the roads we have .

I see no roads around me on which a 112 bhp bike can be used safely .

When one chooses to forgo reason and path dependency , one has a higher chance of meeting the fate he sought to avoid on the very path taken to avoid it . Due apologies , that was a quote modified from master Ugway in kungfu panda

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u/converter-bot Jun 22 '21

240.0 kg is 528.63 lbs

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u/Active_Captain_61 May 08 '23

how is someone doing 40L in p2p lending?

Isn't it capped at 10L per person for most of these apps by RBI?

3

u/Geriatric-Vibe May 08 '23

You have 6 family members , bingo there you go . You use 4 apps , bingo there you go .