The debt asset class is turning attractive now, with interest rates peaking and possible rate cuts. This makes it a good idea to lock in the current yields that are available on quality debt instruments.

Many bonds that are traded on the secondary markets are available for retail investors with the face value ranging between ₹1,000–10,000. Investors can buy these bonds using the demat account.  

Bonds are fixed income securities issued by the corporates and governments. By purchasing a bond, you are lending money to the issuer, who promises to repay you the loan’s face value on a given date and to pay you interest on a regular basis.

These bonds are initially issued and sold directly to investors. The most popular bonds among Indian investors are government securities (G-secs), state development loans (SDL), corporate debentures, tax-free bonds, and sovereign gold bonds (SGB). The Reserve bank of India (RBI) issues G-secs, SDL, SGB and Treasury bills on behalf of the government. They are issued for a specified tenure: usually 91 days to forty years. Corporates issue debentures with the tenure ranging one to 20 years.

G-secs and T-Bills are central government bonds while SDL are issued by the State governments. SGBs were issued by the RBI to reduce India’s dependency on physical gold imports. State-run infrastructure companies were allowed to issue tax-free bonds wherein the interest payments are exempted from the tax.

How to buy

The secondary market involves the trading of existing bonds. Both the BSE and NSE facilitate the purchase and sale of these bonds. They are listed and traded in the cash segment along with equity shares. Retail investors can buy and sell these bonds through demat accounts.

All brokers facilitate transactions in traded bonds using their trading accounts. The new-age bond platforms like Wint Wealth, Bondbazaar, and IndiaBonds, which enable primary and secondary market bond-buying, have made it simple for investors to participate in the debt market.

While investing in bonds through the secondary market, retail investors should not just look at the coupon rate and market price of the bonds. There are three other parameters that the investor should also consider: credit rating, yield-to maturity (YTM) and liquidity.

Bet on highly rated bonds

Those who like to play it safe should focus more on the credit rating — higher the rating, lower the default risk. Credit rating is a qualitative and quantitative assessment of the probability of default on payment of interest and principal on a debt instrument.

Rating is denoted by a simple alpha-numeric symbol, for e.g., AAA, BBB, C and D. While the AAA is the highest rating indicating the lowest risk of default, D indicates the issuer has defaulted on its bonds, or is in bankruptcy, receivership, or liquidation. 

It is mandatory for a bond issuer to get a credit rating from a registered credit rating agency. Some of the credit rating agencies in India include CRISIL, ICRA, CARE and India Ratings.

G-secs are considered to have almost no default risk because they are backed by the Indian government. AAA-rated corporate bonds have the lowest default risk. For instance, the bonds issued by NHB, REC, and PFC are currently rated AAA among the tax-free bonds that are available in the secondary market.

Yield to maturity matters

When an issue opens in the primary market, the coupon rate on the bond is clearly stated, which is the annual rate of return on it.

But in the secondary market, the coupon rate does not matter. This is because the bond may trade below or above its issue price in the secondary market. So, what matters is the yield-to-maturity (YTM).

YTM is the internal rate of return earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and all coupon and principal payments are made on schedule.

This can be done with the help of a financial calculator or excel sheet.

Eye on liquidity

The liquidity or the traded volume is important while buying and selling the bonds in the exchanges. Higher the liquidity, the better the price discovery. In India, many bonds are traded with little liquidity, and you may not get your desired price if there aren’t enough buyers or sellers. This will lead to a higher cost of acquisition.

Only those bonds that are traded almost daily and have volume of at least many thousands to a few lakh rupees at the least are taken for consideration. 

By allowing investors to sell their bonds back to the issuer before the maturity date, the SEBI’s new liquidity window facility for debt securities may attract more retail investors to the secondary markets, ultimately increasing the bonds’ liquidity.

What’s the deal?
By purchasing a bond, you are lending money to the issuer, who promises to repay you the loan’s face value on a given date and to pay you interest on a regular basis
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