What is (De) fractionalisation
(De) fractionalisation (we can use both terms) or tokenisation is a term that is used to break an asset into fractional lots. The reason an asset is broken down into fractional lots is the value of the asset. For example, if a stock is trading at USD 2000 per share, not many investors would be able to buy even 1 share. However, if USD 2000 per share is broken down into USD 100 per unit of the share, then many more investors can invest in the share.
The technology used for fractionalisation is blockchain at this point of time. In future maybe other technologies could be used, Blockchain as most are aware now is the technology used for cryptos, which has caught the imagination of the next gen.
Where is fractionalisation used
Fractionalisation has gained widespread use in equities where high priced stocks are broken down into smaller units for small investors to invest. High priced cryptos too are fractionalised for more widespread participation by investors. Other assets where fractionalisation is used are real estate, art and some high value objects.
Bond fractionalisation is just starting off and is already in use in some global markets. In India, bond fractionalisation is in very nascent stages but there is very keen interest shown by Fintech firms.
Bond fractionalisation
Bonds are normally seen as high value investments with minimum investments running into multiples of Rs 100,000. This is because most of the bonds issued have high face value i.e to purchase 1 bond the minimum investment could be Rs 10 lakhs. Government bonds have face value of Rs 10,000 which is still high as compared to stocks.
Fractionalisation of bonds where a Rs 10 lakh bond is broken down into lots of Rs 10,000 can help in wider participation of retail investors in bond market. Government bonds can be broken down to as low as Rs 100 enabling micro savings. When bond fractionalisation gains momentum in India, the retail bond market can sky rocket and the whole bond market will benefit from depth and liquidity.
We would love to hear back from you. Please Click here to share your valuable feedback.
