Buy Quality Bonds In Primary Issues And Hold Till Maturity

There are certain inherent advantages in the primary issuance of bonds for retail investors. Retail investors can participate in the bond market through two avenues. The first is through mutual funds, which are evergreen. Apart from mutual funds, there is a do-it-yourself (DIY) mode: that is, purchasing corporate bonds. The issue with corporate bonds is the lack of liquidity in the secondary market, at least for retail lots. Hence, when you look to purchase, you may or may not get the bond of your choice. The solution to the secondary market liquidity issue is the primary issuances of bonds.

Buying in primary issues

Primary issuances of bonds are done in lot sizes suitable for all kinds of investors, big or small, unlike the wholesale debt market where trades take place only in large lots. The face value of bonds in retail primary issuances is on the lower side, unlike some private placements where the face value of a bond may be high.

Hence, you can buy as many bonds as to suit your wallet size. By going for a primary issuance, you are doing away with the issue of liquidity in the secondary market, at least while purchasing, as it is available for the offer period. Most of the primary issuances have various maturities; hence, you can pick the one that suits you. Ideally, you should choose the one which you can hold on to, so that you don’t have to come to the secondary market to sell before maturity.

The issue of safety, i.e., credit quality, is relevant here. Normally, the credit rating of the bond is the parameter for gauging the fundamental quality of the issuer. However, due to the events over the past one year, the public’s confidence in credit rating has been shaken. Companies such as IL&FS, DHFL and Reliance Capital were rated AAA at one point of time. Hence, the sanctity of the highest credit rating is not as much as it used to be earlier. Moreover, certain companies in the NBFC sector are facing a funding challenge—they are able to raise amounts only at a relatively higher cost.

To clarify, there is no fundamental issue about the business environment in India or with the NBFC sector. In this situation, you have to look at the credit rating as well as the goodwill and standing of the group. A business house with a pedigree and sound reputation, combined with a high credit rating, can be relied upon. These aspects can be tested. If a company has come out with a bond issuance at a relatively higher interest rate than another firm with the same or similar credit rating, it is an indication that the former has not been able to mobilize funds at a lower cost. Go for AAA-rated ones; consider AA-rated bonds if you are comfortable with the name (i.e. goodwill and track record of the issuer), but don’t go below AA credit rating.

For purchase of bonds, the higher the yield (annualized interest rate) the better. However, there has been a rally in Government bonds, i.e., yields have moved lower. The yield on the 10-year Government bond has eased from 8.2 per cent in September 2018 to 6.5 per cent now. Over this period, yields on corporate bonds have also eased, but to a relatively lesser extent, as it takes time for the movement in Government bond yields to percolate to other segments of the market. The yields of the on-going primary issuances of NBFC bonds are attractive from this perspective.

If you have a demat account, for purchase of corporate bonds, you need not go through a broker, which is the case if you wish to buy in the secondary market. You can apply to the issuer directly by filling in the application form and making the payment/availing ASBA. Once you purchase the bond and hold it till maturity, there is no cost to be incurred every year, which is the case with any managed investment vehicle such as Mutual Fund or PMS. Holding the bond till maturity will do away with the issues of market price movement and secondary market liquidity


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