By Joydeep Sen
Due to certain events over the last couple of months, yield levels, i.e., interest rates on corporate bonds have moved up. It started with the default of IL&FS / group entities, followed by negative sentiments about NBFCs, in particular housing finance companies, and their higher rollover costs. In between, there has been a rally in government bonds; the yield on the 10-year government bond has eased from 8.2% in September to 7.4% now. However, the rally in corporate bonds has not been as much as it takes time for movement in government bonds to percolate to other segments of the market. In other words, yields on corporate bonds are still on the higher side. If you buy-in now, you will be availing of relatively attractive interest rates.
There are two ways to avail prevailing yield levels in the market. One is mutual funds, which are evergreen. The NAVs of debt mutual funds are at current valuations of bonds, and if you enter now, you will get the benefit of these yield levels. Apart from mutual funds, there is a way you can do it yourself (DIY): that is purchase of corporate bonds. The issue about corporate bonds is lack of liquidity in the secondary market, at least for retail lots. Hence if you looking at purchases, you may or may not get the bond of your choice. The answer to that is primary issues of bonds.
Primary issuances of bonds are in lot sizes suitable for all kinds of investors, big or small. The face value of bonds in retail primary issuances is on the lower side unlike some private placements. Hence you can buy as many bonds to suit your wallet. By going for a primary issuance, you are doing away with the issue of liquidity in the secondary market. Most of the primary issuances have various maturities, hence you can pick the one that suits you. Ideally, you should choose the one up to which you can hold it, so that you need not come to the secondary market before maturity.
For the decision to invest or not to invest, go by the credit rating. Preferably go for AAA rated ones, as they denote highest safety. Otherwise, you may go for 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. The other issue is about the NBFC sector and the negative noise, particularly housing finance companies. Over the period of time, the negative noises are expected to subside. Since the breakout of the IL&FS default, sentiments have already improved somewhat and will stabilise going forward.
The credit quality concern
The yields on bonds issued by NBFCs are on the higher side as there are certain concerns; e.g. asset-liability mismatch (i.e. funding long term with short term sources) or rollover costs (issuing another instrument at a higher yield to the same investor). However, the issue of asset-liability mismatch has always been there, even banks have asset-liability mismatch. High rollover costs of NBFCs is a concern, but that is the reason you are getting a relatively higher interest rate on your bonds. To manage the credit risk, you may do a diversification of your portfolio of bonds among multiple issuers and go for bonds rated AAA or AA+.
As long as you have a demat account, for purchase of corporate bonds, you need not go through a broker, which is the case in the secondary market. You can apply to the issuer directly by filling in the application form and making the payment. 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 like mutual funds. Holding the bond till maturity will do away with the issues of market price movement and secondary market liquidity.