How investing in a private credit fund is different from investing in an unlisted bond

A good investment yields high returns and provides the flexibility to withdraw in an emergency. Before making any investment decision, one should take a look at the entire financial situation.

Investors should figure out the objectives and risk tolerance. There are multiple investment options that put the money in assets or businesses with the aim of generating profits, like unlisted bonds and credit funds.

So, what are unlisted bonds?

Unlisted bonds are debt securities not listed in any recognised stock exchange. These bonds are traded over-the-counter (OTC), meaning a broker or a middleman is involved in the transaction. They can be bought and sold easily with the help of market makers, as they are not traded on an exchange.

They are not issued to the public at large and are generally invested by large institutional or private investors. They typically have fixed interest rates and can be more volatile to market risks.

Features

Higher yield: These generally offer higher yields than listed bonds, making them appealing to income investors.

Diversification: Including unlisted bonds in your portfolio can help diversify risk across different asset types and sectors.

Tax benefits: Certain unlisted bonds provide favourable tax treatment, particularly on interest income.

Potential undervaluation: Because of their illiquidity, unlisted bonds frequently have fewer investors ready to keep them for an extended period. As a result, these shares may be cheap due to less competition.

And, what is a private credit fund?

Private credit refers to the capital that private funds loan to businesses through direct lending or structured finance arrangements. This occupies a unique space in the credit market and its demand is also increasing.

They offer funds to borrowers who are not able to access traditional bank finance. These investments are less affected by market fluctuations and often have floating interest rates.

ALSO READ | What is private credit and how it differs from traditional forms of financing

Features

Diversification: These funds work across a diverse range of credit instruments like senior secured loan, and distressed debt, offering higher yields than other types of investments.

Less market risk: They are less affected by the fluctuation of the market or economic downturns as they are not publicly traded.

Higher yield: These funds offer a higher return than other traditional investment options.

Flexibility: Private credit funds offer the benefits of flexibility in financing. Under these, loan structures are tailored to suit the needs of the borrowers.

Shorter duration: They also provide the advantage of shorter durations as compared to traditional fixed-income products.

Attract capital inflows: The expansion of private credit funds in India has drawn significant capital from domestic and international investors looking for higher risk-adjusted returns. As more investors gain confidence, they can attract more capital, allowing them to support a wider range of enterprises.

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