Many bond platforms are busy wooing fixed-income investors. The Reserve Bank of India recently launched the RBI-Retail Direct. JM Financial has unveiled bondskart.com, which facilitates investments in bonds. Here are a few things you should know before you start investing in bonds via these platforms.
The ease of technology
Of late, technology has made it possible for small investors to invest in a cost-efficient manner. Large ticket sizes of Rs 25 lakh or Rs 1 crore are no longer needed.
The negative real interest rates on good quality bonds are making investors search for high yield. That has been another reason why bonds offering higher yields (of course, at a higher credit risk) are in vogue. Even conservative fixed deposit investors are willing to explore bonds in search of higher returns.
Ajay Manglunia, MD& Head, Institutional Fixed Income, JM Financial says, “The launch of the bond platform offers a variety of papers in the fixed income space to individual investors who were not adequately serviced. The platform not only offers bonds, but also allows investors to sell their securities, as there are two-way quotes offered.”
What’s on offer
Bond platforms allow you to open trading accounts for free. Know your client (KYC), seeding bank account, demat account and nomination details can be completed online. The minimum ticket size of the investment varies from platform to platform. You can start investing with Rs 1,000 on bondsindia.com. In the case of JM Financial’s Bondskart.com, the minimum threshold for transaction is at higher of Rs 2 lakh or the minimum ticket size of the bond.
Bond platforms offer government securities, high-quality corporate bonds, instruments with AA and lower ratings, market-linked debentures and even perpetual bonds.
Are platforms safe?
Bond platforms ensure digital transactions in a secured environment. Some carry out the transactions on the stock exchange. Others transfer money and securities using the services of clearing corporations. Both are secure modes of transaction involving little counterparty risk.
Joseph Thomas, Head of Research, Emkay Wealth says, “Investors must consider the institutional credibility of the promoter of the bond trading platform and also the critical safety features of the bond trading engine.” Thomas says that a good way to select a platform to buy bonds is to check if the platform offers two-way prices or at least allows access to liquidity with ease in case of a need for exiting. More importantly, there should be access to quality advice concerning both market risk and credit risk for the individual investor.
“Some investors prefer to buy high-yield bonds of issuers where they may already have a fixed deposit. Investors are comfortable investing in bonds of reputed companies, irrespective of the rating,” says Puneet Aggarwal, Founder & Director, BondsIndia.com. For example, investors are comfortable buying a perpetual bond of a bank since it pays higher coupon compared to rate of interest on the fixed deposit in the same bank. Instead of purchasing AA-rated bonds of a lesser known issuer, investors do not mind an A-rated paper of a reputed group since they are comfortable with the credentials, he adds.
Should you invest?
The interest on the bonds is taxable in the hands of the investors, which makes it an unattractive proposition for those in the higher income tax slabs. Bonds, barring government securities and the high quality AAA rated corporate instruments, are not so liquid in the secondary market. “You can sell those bonds, but the pricing may be little off from the correct or fair level,” says Joydeep Sen, corporate trainer-Debt.
Investing in a bond issued by one issuer can be risky. It makes sense to diversify across issuers, says Thomas. This makes investing in bonds through debt mutual funds better, easier and more convenient.
Investors can consider short duration funds with a minimum three-year timeframe to earn healthy risk-adjusted tax-efficient returns.
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