Secondary market bonds are varied: What you should know about investments

The platform offers liquidity and flexibility to bondholders wanting to sell before maturity

As the debt market evolves, investing in bonds through the secondary market has become an attractive option for both institutional and retail investors. Investors in this market can buy and sell bonds already issued, but navigating it requires an understanding of several factors.

 

Understanding the secondary bond market

 

The secondary market offers liquidity and flexibility to bondholders wanting to sell before maturity. Transactions here happen between investors and proceeds go directly to the seller, not the issuer.

 

Types of bonds in Indian secondary market

 

PSU bonds: Issued by public sector companies, where the government holds more than 51 per cent of the shareholding.

 

 

Corporate bonds: These are issued by corporations to raise funds from the market, offering higher yields than government securities.

 

Tax-free bonds: The interest earned from these bonds is typically exempt from taxes.

 

Government securities: To finance public projects, the government raises funds by issuing securities to the public.

 

Sovereign gold bonds: Issued by the central government, these bonds provide a secure way to invest in digital gold.

 

Green bonds: These bonds are specifically designed to raise funds for environmental and climate-related projects.

 

Covered bonds: Typically issued by local governments or their agencies to finance public infrastructure projects such as parks and roads.

 

“To make wise investment choices, several criteria should be carefully taken into account when purchasing bonds from the secondary market. Credit quality is crucial; use credit ratings from organizations like CRISIL or ICRA, among others, to determine the issuer's creditworthiness,” said Amar Ranu, head - investment products & insights, Anand Rathi Shares and Stock Brokers.

 

“While lower-rated bonds, like junk bonds, pose more risk but produce larger returns, higher-rated bonds, like AAA, are safer but offer lower yields.”

 

“Another important consideration is interest rate risk; bond prices and interest rates have an inverse relationship. One should also consider the bond's tenure and the present interest rate environment because rising rates can lower bond prices. Additionally, liquidity is crucial; make sure the bond can be bought or sold with ease and without having a big effect on the price,” Ranu said.

 

All bonds are taxable, except for tax-free bonds. To match your investment horizon and risk tolerance, one should also consider the bond's maturity date and the issuer's financial standing.

 

Key steps for selling bonds in the secondary market

 

Assess market conditions: Bond prices fluctuate based on interest rate movements — rising rates can lower bond prices, while falling rates can increase them. Evaluate current market trends before proceeding with the sale.

 

List bonds for sale: When ready to sell, you can list your bonds on exchanges like the National Stock Exchange and BSE or work through a broker.

 

Track demand and supply: Liquidity plays a crucial role in selling bonds. Government and well-known corporate bonds typically have higher demand and trade more easily than lesser-known bonds.

 

Negotiate pricing: If the bond has limited market demand, be prepared to negotiate the price. Bonds with lower trading volumes may require adjusting price expectations for a successful sale.

 

Complete the transaction: Secondary market bond transactions generally have a swift settlement process, often clearing within T+2 or even T+1 days.