- What are STRIPS Bonds?
- Full Form: Separate Trading of Registered Interest and Principal of Securities.
- How They Work: A STRIP bond is a type of debt instrument where the principal and coupon payments are divided and sold individually.
- Advantage: Eliminates reinvestment risk and offers flexibility to match investment goals.
- Why Are They Popular?
- Insurance & Pension Funds: Ideal for managing long-term liabilities with predictable, stable returns.
- Portfolio Flexibility: Allows precise matching of future payouts with maturity dates.
- Mandatory Investment: Insurers must invest a portion of their funds in government securities, making STRIPS a natural fit.
- Government vs State STRIPS
- Central Government STRIPS: Issued by the Indian central government; widely traded.
- State STRIPS: Offer higher returns (0.3–0.4%) due to lower liquidity, attracting insurers.
- Key Risks
- Market Sensitivity: Rising interest rates may reduce the resale value of existing STRIPS.
- Nascent Market: Still developing in India, with limited accessibility for retail investors.
- Who Benefits?
- Big Players: Insurance companies, pension funds, and institutional investors.
- Retail Investors: Can participate via brokers or mutual funds but need to watch for market changes.
- Why in News?
- Trading in STRIPS has surged (tripled since FY21, 600% growth since FY19) as insurers push for more state-issued STRIPS for better returns.
STRIPS are a growing asset class, promising stability and flexibility for institutional investors while offering cautious opportunities for retail players.
