The battle between equity and debt has been there for a long time now. Moreover, it won’t be wrong to say that equity has consistently topped the charts regarding returns. Although, I am not sure if it stands at a respectable position in terms of risk. Well, on the other side of the coin, none of the asset classes have been as safe as a healthy credit-rated or government-backed debt. And let me tell you that these aren’t just words; it is a fact-based social delivery, the proof of which has been divulged down below.
Since we are drawing a comparison between equity and debt, I believe that it will be a good idea to draw parallels between their humble offerings in the Indian context. Let the drums be rolled and crackers are cracked, welcome your first indebted protagonist for the day, Sovereign Gold Bonds. Moving on the next, welcome the not so famous and not so celebrated contestant, Private Equities.
Well, I don’t think anyone is betting on the latter! However, choices are subjective and are therefore bound to be changed. Oh! The philosophical me.
Tracking back, here is a small brief on Sovereign Gold Bonds (SGBs).
SGBs are debt instruments issued by the Reserve Bank of India on behalf of the Government of India. The Bonds are denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The Bond’s tenor is fixed for eight years with an exit option in the 5th, 6th, and 7th years, which is to be exercised on the interest payment dates. What else do you need when you have government-backed securities, right? Well, not just you, but everyone needs private equities. It’s like they are a must! And since you may ask that, why did I say so? Here is what I have to support my argument.
Tenor
Tenor is nothing but the expiry date of a bond, and aligning with the fundamental trait of bonds, SGBs have a tenor of 8 years. Post which, the borrower repays the principal amount along with the prior interest or coupon payment. But amigo! Private Equities do not have such provisions as investors can stay invested as long as they want.
Lock-in period
SGBs have a lockin period of 4 years, with exit options made available from the 5th year. What this means is that there is a magnanimous opportunity cost. How? Because you are devoid of the facility of the reallocation of funds in a higher return generating investment avenue. It is not the case with private equities, again. Until and unless they don’t go for an IPO. However, even if they go, the lockin is just for six months.
Returns
Here is where the real talk begins! SGBs offer a semi-annual fixed coupon payment of 2.5%. At the same time, the average returns from various Indian private equities have been ten to a hundred times higher.
Real Returns
Generating returns is one thing and generating actual returns is another. What matters the most is the latter because a return is only helpful if it’s higher than the prevailing inflation rate.SGBs, in terms of absolute return, hardly surpass the hurdle or inflation rate even if with their semi-annual coupon rates combined. Therefore, private equity is by far a better choice as the average annualized returns calculated between January 7, 2021, to December 30, 2021, stood at a gigantic 59.62%.
Closing Remarks
Return for Risk! Investment in Private Equity is a splendid and superlative choice. However, you have to factor in your risk profile before parking your money, as these are riskier than a traditional debt instrument. There is no denying that Private Equities are supreme when it comes to generating returns, whereas SGBs secure the top spot in terms of security. It’s a very simple tradeoff.
Now that you have seen how private equity outperformed the Sovereign Gold Bonds (SGBs), you might be excited to invest in them. Therefore, to serve your need of the hour, here is Leadoff, a holistically technology-driven platform that works with a purpose to democratize the private equity market of India. Our core mission is to enable investing in the equities of the high-growth private companies of India by streamlining and securitizing the entire process.
If you’d like to reserve access on Leadoff to acquire private shares — click the Reserve Access button below: joinleadoff.com
