Pay heed to residual maturity in secondary market bond buys: Experts

Avoid longer-duration bonds; if you buy them, hold till maturity

Many platforms have cropped up in the recent past that have made it easier for retail investors to participate in the secondary bond market. There is the Reserve Bank of India’s Retail Direct Scheme, which allows them access to both the primary and

secondary market for government securities (G-Secs).

Bonds are also listed on the stock exchanges. Lately, several specialised bond trading platforms have also emerged, such as bondsindia.com, bondskart.com, and so on.

Improved access

Sometimes, bonds may not be available when you try to buy them through the exchanges. But these bonds may be held by these platforms on their books, or may be available with one of their clients, which they make available to

customers.

These platforms have also lowered the entry barrier for retail investors. On some, you can buy bonds with a minimum amount of just Rs 1,000.

No need to wait for primary issuances

Many investors look for a particular type of bond, say, tax-free bonds, which may not be available on tap in the primary market. Also, at times bonds trade at higher yields (and lower prices) in the secondary market compared to the primary market due to lack of liquidity.

Investors can pick and choose the right bonds for their portfolios in the secondary market.  

“The secondary market offers bonds with varied maturities, structures, and interest-payment frequencies. An investor can buy the bond that suits his needs instead of waiting for a primary issue,” says Vikram Dalal, managing director, Synergee Capital Services.

Rates likely to harden

The Union Budget 2022-23 unnerved many fixed-income investors with its announcement of a relatively high government borrowing programme. But it did not usher in the tax changes that would have facilitated Indian bonds’ inclusion in global debt indices and led to foreign fund inflows. The 10-year benchmark yield rose sharply after the budget.

In its recent monetary policy review, the RBI continued its accommodative stance amid persisting inflation-related worries. In this environment when rates could head upward, investors taking the secondary market route need to do proper due diligence.

Avoid high credit risk

In the low interest-rate regime that prevailed during the past couple of years, many desperate investors put their money in higher-yield bonds. Bonds with lower credit quality offer higher yields but also carry higher default risk. Avoid bonds with

below-AA rating. Purchasing G-Secs also allows investors to circumvent credit risk.

Stick to shorter-duration bonds  

Your investment horizon and the bond’s residual maturity (its remaining life) should align when you make a secondary market purchase, where a lot of options are available. “Bonds with maturity ranging from three months to 40 years are available,” says Deepak Panjwani, vice president and head of department, debt market, GEPL Capital.

Interest rates are set to harden. “Rising rates and higher supply of bonds will put pressure on bond prices. In such a scenario, opt for shorter-duration bonds,” says Panjwani.

Vibhor Mittal, chief business officer, CredAvenue, too suggests sticking to bonds with tenors of not more than 15 months. Longer-duration bonds will take a bigger mark-to-market hit as rates rise. Buy them only if you can hold till maturity.

Residual maturity also becomes crucial in the case of illiquid bonds. “Exiting these bonds by selling in the secondary market is usually not possible without taking a steep haircut, so investors may need to hold them till maturity,” says Mittal.

Liquidity matters

Liquidity enables investors to exit a bond any time they want by selling it at the right price. “Central PSU (public sector unit) bonds and highly-rated (AAA) bonds enjoy good liquidity,” says Dalal. Avoid illiquid offerings.

If you are buying a bond to cater to your regular income needs, check the interest distribution schedule. Some listed non-convertible debentures (NCDs) pay interest monthly, while others pay it half-yearly or annually.

Debt mutual funds, which offer access to a diversified bond portfolio, should also be considered before buying individual bonds.