The Indian debt market while composed of bonds, both government and corporate, is dominated by the government bonds. The central government bonds are the predominant and most liquid component of the bond market. In the offing is the new Interest Rate Derivatives Segment. Mr. Arun Kaul, GM, Punjab National Bank, explained that during the year there was an almost three fold increase in volume - against a daily volume of Rs. 1000 crore, the daily volumes now are almost at par with Gilts markets. However despite the increased volumes, the number of participants is limited to about two dozen active players. Since a majority of the participants are triple A-rated and 80 per cent of the trade is direct, there exist minimal settlement risks. The market would further develop once uniform guidelines on accounting, valuation and so on are in place. On the other hand the system of valuing the Interest Rate Futures on Zero Coupon Yield Curve has limited its popularity among participants. Using the YTM curve for the valuations would help in developing the market for this instrument.

The bond markets exhibit a much lower volatility than equities, and all bonds are prices based on the same macroeconomic information. Bond market liquidity is normally much higher than stock market liquidity in most of the countries. The performance of the market for debt is directly related to the interest rate movement as it is reflected in the yields of government bonds and corporate debentures, MIBOR related Commercial Papers and Non Convertible Debentures . In order to remain competitive in the market and also to improve the profitability, corporate clients are looking for low cost funds. Mumbai Inter-bank offered rate (MIBOR) is fluctuating in nature and indicates prevailing rates in money market. Banks have introduced MIBOR linked low cost lending schemes to top rated corporate clients, having a minimum credit rating as "A". The liquidity in the system also impacts the yields on the short term instruments such as the CPs and NCDs. The government borrowing program under the market stabilization scheme (MSS) is a tool to manage liquidity in the system with the long term view. Another temporary tool used to manage liquidity in the system is the Liquidity adjustment facility (LAF). The investment strategy that can be kept in mind is that, if the interest rate in the economy is moving downward, one tries to maximize the yield by investment in long term maturity instruments which were issued earlier and carry the interest rate for the yield or coupon greater than current available interest rate. In case of the rising interest rate scenario in the economy, it is advisable to minimize the duration or maturity profile of instrument or portfolio that is hold. This would minimize the potential losses by keeping lower yielding long maturity instrument in the portfolio. Taking the approach of the noted Professional Investor and better known to be "Father of Value Investing" - Benjamin Graham, opting for a passive or defensive strategy takes little time or effort but requires an almost ascetic detachment from the alluring hullabaloo of the market.

Finally, let us have a light glimpse of the subtleties and pitfalls of the debt instrument. Let us take into consideration there is less uncertainty about the cash flows accruing to the bond holders as opposed to the share holder. The emphasis is therefore more on the fine calculations and analysis of the instrument. These computations are not favorable in equities as there is greater uncertainty about the numbers that one is working with. Practically the bond prices move or fluctuate less than equity prices and when desired superior performance has to be on the lookout for the even smaller differentials in prices and returns. The investor should ponder the level of risk of the debt market as to prosper effectively on portfolio strategy making. The debt market instrument is not entirely risk-free. Specifically two main types of risks are involved i.e. default risk and the interest rate risk. The former arises when the company defaults the interest or principal obligation. The later occurs when the bond doesn't represent the true return to the investor over his holding period unless the interest rates remain unchanged throughout the holding period. The holding period return is exposed to the interest rate risk. To manage the bond portfolios, we must assess the two components of risk and evaluate the Yield To Maturity in relation to this risk. Lastly, I must quote from the investment thinker Charles Ellis who says "it requires emotionally demanding approach" for the debt instrument strategy making.