Bonds are an ideal investment avenue for investors with the objective of capital protection and periodic income. Bonds include treasury bills, government securities, and corporate bonds. In India, the bond market is not as developed as the equity market. How to purchase and sell bonds varies based on the issuer and investor type.
How To Buy & Sell Bonds?
Institutional investors such as mutual fund houses, insurance companies, and trusts are big players in bond securities. In contrast, the market share of retail investors, NRIs, and HNIs investing in bonds are relatively small.
How to buy bonds
Government Securities and Treasury Bills
Reserve Bank of India, State and Central Governments, Municipal Boards, and Local Authorities issue government bonds and treasury bills. How to buy and sell bonds differs for retail and institutional investors.
Institutional Investors – Government securities are auctioned through a competitive bidding process. Typically, the bid rate is higher than the face value. Hence, bond yield is lower than the interest rate.
For example, the government offers bonds with a face value of Rs. 100 and an interest rate of 6% per annum. Through the auction, investors place bids for the bond. The issuer decides a cut-off rate based on the bids received. Let’s suppose the cut-off rate is Rs. 140. The issuer will allocate securities to investors with a quote more than or equal to Rs. 140. The effective yield is 4.28% (6%/140*100).
Retail Investors – In November 2017, the government introduced a non-competitive bidding facility. You require a mobile or web app of NSE called “NSE goBID’’. An investor must register online on the app.
To purchase bonds, you must carry out the following steps:
- Login to your account with a unique username and password.
- The dashboard tab details the current, past, and forthcoming issues. Details such as bidding dates, issue size, price per security, and bid value range are available.
- Select the issue and place a bid by entering the investment value and price per security.
- Make the payment online. You may also view details for active, cancelled, and rejected bids.
Corporate Bonds and Deposit
You can purchase corporate bonds or deposits through a broker, banker, or bond trader in the primary market. You may also buy some bonds over the counter. The intermediary provides face value, coupon rate, credit rating, tenor, allotment, and redemption dates for efficient decision-making.
How to sell bonds
An investor may not necessarily hold a bond for its entire tenure. He can sell it in the secondary market to another buyer.
Unlike the equity market, the trading volume of the secondary market for bonds is much lower. Thus, the liquidity in the bond markets is comparatively lesser. Most bond investors purchase securities intending to hold for the entire tenure.
Bond Investment Strategies
For any investment avenue, the ideal strategy is a factor of your investment goal, risk appetite, and time frame. Bond investment strategies include a vanilla buy-and-hold approach or complex trades involving interest rates and inflation. Investment goals include capital protection, regular income, tax liabilities, and risk management.
High-net-worth individuals may prefer to buy bonds and lock in the capital for the entire bond tenure even with low yields. The objective for such investors is capital protection. For a retired investor, recurring revenue is essential and may choose to invest in bonds.
In India, the government issues tax-free bonds. The yield of these bonds is lower, but the income earned is exempted from tax. For investors in the maximum tax bracket, tax-free bonds are an exciting avenue for investment.
Similarly, investors with a lower risk appetite prefer government-backed securities. Corporate bonds and fixed deposits are relatively risky. The credit rating allocated for such corporate bonds is commensurate with the risk involved.
How to select the best broker for bond trading?
Finding a respected, trustworthy bond broker is essential for bond trading. Consider the following points to select the ideal broker –
Trading History – Higher the years of operation, the broker is safer. A minimum vintage of two years is essential.
Customer Base – A broker with a broader market reach is better than a newly incorporated broker.
Turnaround Time – The turnaround time for deposit or withdrawal must be two-three days. The process of fund transfer must be seamless and hassle-free. ,/p>
Transparency – Transparency is of utmost importance while selecting a broker. The broker must provide timely reports and relevant disclosures.
Other factors include compliance with relevant regulations, international presence, and various services offered. In India, the market for bond brokers is untapped, with only a few significant players. IIFL is the best option to begin your bond-trading journey. All you need to do is visit the IIFL website or download the IIFL Markets app to get started.
Bottom Line
In India, the average return from government bonds is 7% per annum in the long term. On the contrary, the average return from equity investments easily crosses 15% over five years. Thus, equity is the more preferred investment alternative.
However, over the last decade, retail investors have been actively investing in bonds with the objective of portfolio diversification. Investors use Government securities and T-Bills for portfolio risk management.
