How to Buy and Sell Bonds in India?

Bonds are one of the many investment options available in India. They’re relatively safer than equity and offer a stable source of income, making them an ideal option for risk-averse and conservative investors. From government securities to corporate bonds, there are many different types, each with its own set of advantages and disadvantages.

If you’re wondering ‘How can I buy government bonds in India?’, here’s a comprehensive guide that can help you achieve your objective.

Why invest in bonds?

Investing in bonds offers several advantages that can enhance your investment portfolio. Bonds are considered relatively safer than stocks because they provide fixed interest payments, offering a stable income stream. This makes them particularly attractive for risk-averse investors and retirees looking for regular income. Additionally, bonds can help diversify your investment portfolio, reducing overall risk by balancing the more volatile nature of stocks. Governments and highly-rated corporations issue bonds, which can further lower default risk. Moreover, bonds typically have a predictable maturity date, allowing investors to plan their finances more effectively. In times of economic uncertainty, bonds often act as a safe haven, preserving capital while still generating returns.

How to invest in bonds?

Investing in bonds can be done through various channels, each with its unique features. Here are some common methods:

• Direct Purchase:

  You can buy bonds directly from the issuer, such as government or corporate bonds, through public offerings or private placements.

• Brokerage Accounts:

  Bonds can be purchased through brokerage accounts. Many online platforms offer easy access to a wide range of bonds, including government, municipal, and corporate bonds.

• Bond Funds:

  Investing in bond mutual funds or exchange-traded funds (ETFs) allows you to invest in a diversified portfolio of bonds, managed by professional fund managers.

• Banks and Financial Institutions:

  Some banks and financial institutions offer bonds directly to their customers, providing an easy way to invest without needing a brokerage account.

• Government Platforms:

  In some cases, government bonds can be purchased directly through official platforms, such as the Reserve Bank of India's Retail Direct scheme.

Factors to keep in mind before investing in bonds

When investing in bonds, it is crucial to consider several factors to make informed decisions and optimise returns:

• Credit Rating:

  Assess the creditworthiness of the bond issuer. Higher-rated bonds (AAA or AA) are less risky but typically offer lower returns compared to lower-rated, high-yield bonds.

• Interest Rates:

  Bond prices are inversely related to interest rates. When interest rates rise, bond prices fall, and vice versa. Understanding the interest rate environment can help you time your bond investments better.

• Maturity Period:

  Bonds have varying maturity periods, from short-term (less than 3 years) to long-term (over 10 years). Align the bond's maturity with your financial goals and liquidity needs.

• Yield:

  Consider the bond’s yield, which includes the interest payments and any capital gains or losses. Comparing yields across different bonds can help you choose the most beneficial investment.

• Tax Implications:

  Interest income from bonds may be subject to taxes. Some bonds, like municipal bonds, may offer tax-exempt interest. Understanding the tax treatment can affect your net returns.

Factors to keep in mind before selling bonds

Before selling bonds, it’s essential to evaluate certain factors to ensure you’re making a well-timed and profitable decision:

• Market Conditions:

  Assess current market conditions, including interest rates and economic outlook. Selling bonds during periods of rising interest rates may result in capital losses.

• Bond Prices:

  Check the current market price of your bonds. Selling when prices are high can maximise your returns, whereas selling during a market dip may incur losses.

• Remaining Maturity:

  Consider the bond's remaining maturity period. Bonds nearing maturity will have less price volatility, and you may benefit more by holding until maturity.

• Yield to Maturity (YTM):

  Evaluate the yield to maturity. If the YTM is favourable compared to current market yields, it may be better to hold the bond.

• Liquidity Needs:

  Assess your liquidity requirements. If you need immediate funds, selling may be necessary, but consider the costs and potential loss of future interest payments.

• Tax Considerations:

  Selling bonds may trigger capital gains taxes. Evaluate the tax implications and consider tax-efficient strategies, like offsetting gains with losses or holding the bond until a more favourable tax period.

• Investment Goals:

  Align your decision to sell with your overall investment strategy and financial goals. Ensure that selling the bond supports your long-term objectives and portfolio balance.

How To Buy & Sell Bonds?

The bond market in India is usually dominated by large institutional investors. These investors include mutual fund houses, pension funds, trusts and life insurance entities. Although retail investors and High Net Worth Individuals (HNIs) also are a part of the bond market, they’re relatively fewer in number.

• How to Buy Bonds?

  When it comes to purchasing bonds, the procedure that needs to be followed may vary depending on the type of bond.

• Government securities

  (G-Secs) are issued by entities like the Reserve Bank of India, municipalities, corporations and central and state governments. Here’s a gist of how to buy and sell treasury bills and other government securities.

  • Institutional Investors

    Institutional investors are required to go through a competitive bidding process. The higher the bids for the securities, the greater the chances of allocation. Generally, the bid rates for government bonds tend to be higher than their face value. This effectively means that the yield would be lower than the interest rate of the bond.

    Here’s an example to help you understand how the bidding process works. Assume that the Reserve Bank of India (RBI) issues a bond with a face value of Rs. 1,000 at an interest rate of 7% per annum. Interested institutional investors can place bids for the same.

    Once the bidding process is over, the RBI announces a cut-off price based on the number of bids and the bid price. Let’s assume that the cut-off price is Rs. 1,100. All of the institutional investors who bid on or above Rs. 1,100 will get allotment, whereas those investors who bid less than the cut-off price will not be eligible for allotment.

  • Retail Investors

    Retail investors, on the other hand, are required to go through a non-competitive bidding process. The NSE goBID is an online platform designed to enable retail investors to invest in government securities. The process that you need to follow to purchase G-Secs is as follows.

    • Step 1:

      Visit the NSE goBID website or download the NSE goBID application on your smartphone.

    • Step 2:

      If you’re a new user, register yourself on the portal. If you’re an existing user, simply use your credentials to log in.

    • Step 3:

      The portal’s dashboard will give you information on the past, current and future G-Sec issues along with details such as the issue size, bid range, opening and closing dates and price per bond or security.

    • Step 4:

      Choose the G-Sec that you wish to purchase and enter your bid.

    • Step 5:

      Complete the payment online.

    That’s it. If your bid is at or above the cut-off price, you may be eligible for allotment. If not, your bid will be rejected and the payment that you made will be refunded to your account.

• Corporate Bonds

  Unlike government securities, purchasing corporate bonds is comparatively very easy. All you need to do is log into your trading account, navigate to the corporate bonds section, choose the bond that you would like to purchase and complete the process. Some banking institutions also act as intermediaries for corporate bond issues. In such cases, you can simply fill out and submit your application to the banker. When purchasing corporate bonds, make sure to thoroughly look at factors such as the face value, tenor, coupon rate and credit rating, among others.

• How to Sell Bonds?

  One of the major advantages of bonds is that you need not hold them till the end of their tenure. You can, at any point in time, sell it on the secondary market to recover your investment capital. Wondering how to sell bonds in the secondary market? Here’s what you need to do.

  • Step 1:

    Log into your trading account using your user credentials.

  • Step 2:

    Since the bonds that you have purchased are stored in your demat account, they should show up under the holdings or investments section of your trading portal.

  • Step 3:

    Select the bond, enter the quantity and the selling price.

  • Step 4:

    Place the sell order.

  That’s it. Your sell order will be matched with a corresponding buy order by the exchange. Once your sell order will be executed and the funds realised from the transaction show up in your trading account.

  That said, keep in mind that unlike the equity market, liquidity in the bond market is comparatively lower.

Bond Investment Strategies

Now that you know how to sell bonds in the secondary market, let’s take a look at two of the most popular bond investment strategies.

Most bond investors follow the buy-and-hold strategy where they purchase bonds and hold them until the end of their tenure. However, there are a few investors who actively trade bonds in the secondary market like equity shares to capture small price movements.

The ideal bond investment strategy for you is dependent on a host of factors such as your investment objectives, risk profile and investment horizon. For instance, if you’re a conservative investor who is keen on protecting capital and getting stable returns, the buy-and-hold strategy may just be the one for you.

On the other hand, if you’re a risk-aggressive investor with a short time frame and extensive knowledge of the bond market, you may consider adopting a more trading-oriented approach.

How to Select the Best Broker for Bond Trading?

If you’re interested in bond trading, it is crucial to find the right bond broker. Here are a few factors that you can consider when selecting a broker.

• Trading History

  A bond broker with a long history often has a better reputation than a relatively new broker. Therefore, make sure to sign up with a broker with at least a decade of experience in the bond market.

• Customer Base

  Similarly, a broker with a large customer base is generally preferable compared to one with a smaller base.

• Turnaround Time

  The time taken for deposits and withdrawals should be as low as possible. The fund transfer process should also be easy and simple.

• Transparency

  It is advisable to choose a broker who is transparent and provides detailed reports and disclosures promptly.

  In addition to the factors listed above, you could also look at their corporate governance and compliance with the various bond market rules and regulations to get a better idea of the broker.

Conclusion

Until recently, the bond market participants were primarily made up of large institutional investors and a few high-net-worth individuals. However, of late, there has been a steady influx of retail investors who are turning towards bonds as a means to secure a stable source of income and diversify their portfolio.

If you’re interested in investing in bonds, consider opting for a reputed broker like m.Stock. With m.Stock’s trading and demat account, you don’t have to pay any brokerage or hidden charges for life. Furthermore, you also get to enjoy zero Annual Operating Charges (AMCs) on your demat account and a Pay Later (MTF) with interest rates starting from just 6.99%.