Certain investments like bonds and closed-end debt mutual funds come with a maturity date. You would say, that’s normal. However, there are ways of taking advantage of it, if you have the investment horizon to hold till maturity. Even in equity, though it does not have any maturity per se, to a limited extent, you can apply this strategy to your advantage. Savvy investors can use this to their benefit. Let’s see how.
One issue with the bond market is that the secondary market is not liquid, at least for the retail investor. The secondary market is institutional, i.e. it comprises large institutions which trade in wholesale lots. If you buy a bond in a primary issue and need liquidity before maturity, it is possible to sell in the secondary market, but you may have to offer a higher yield to the buyer. That is, suffer a relatively lower price to find a buyer. The other side of the coin is, if you can hold a bond till maturity and there is a desperate seller in the secondary market, you can take advantage by buying it at a relatively cheaper price, i.e. higher yield than the prevailing market situation.
To trade in bonds, you need to have a trading account with a broker, or you can’t participate in a security listed at the exchange. If you are not dealing with a broker regularly, you can buy bonds in a primary issue, for a maturity suitable for your investment horizon. Most primary issues are reasonably “priced”, offering a decent yield commensurate with the credit rating and goodwill of the issuer.
Having said that, you can take advantage of higher yields in the secondary market. But how do you make out that the yield is attractive? You can track the websites of NSE or BSE for bonds with a decent credit rating and maturity commensurate with your investment horizon. The traded history will give you an idea of the bond’s price range. When you see a sell quote at a relatively lower price, you can contact your broker. For general market trend—whether yield levels are moving up or down—you can track government securities of comparable maturity, on the Clearing Corp. of India (CCIL) website.
Closed-end mutual fund schemes—fixed maturity plans (FMPs)—purchase bonds that mature at the maturity of the scheme. FMPs are listed at the exchange, but there is no liquidity in the form of redemption with the asset management company (AMC). The secondary market for FMPs is more illiquid than bonds, and there is no institutional market either. Should you be required to sell before maturity, you will have to offer a steep discount in price to the buyer. Here also, you can take advantage by purchasing FMPs in the secondary market, provided you have an account with a broker or are availing the services of a full-service wealth manager.
New fund offers (NFOs) of FMPs are akin to primary issuances of bonds. You can subscribe to FMP NFOs in the normal course, without a trading account with a broker. Currently, yields on bonds are on the higher side; you can take advantage by buying FMPs and holding till maturity.
Equity as such does not have any maturity. However, there are equity-linked debentures (ELDs), which are essentially bonds but the return on the bond is not like the coupon or interest in regular bonds. In ELDs, the return is linked to movements in the equity market, which is defined as a set of terms in the instrument. There are multiple possible terms in ELDs, which define your returns as per various sets of movement in the equity market. If you are bullish on the equity market or a particular set of stocks but don’t want to risk your principal, you may take advantage of ELDs.
Just like in the earlier two instances, the secondary market for ELDs is illiquid. You have to hold the investment till maturity. Another drawback of ELDs is that it is an HNI product; it’s not available for masses. You have to be serviced by a full-service wealth manager and have to have a minimum investment ticket size to subscribe to this. The advantage is that there is flexibility in terms of the product, i.e. variability with the equity market, maturity horizon and others.
Though technically these are shares, these are conceptually like bonds as there is a defined redemption date, defined dividend (similar to bond coupon) and credit rating. Even for preference shares, secondary market liquidity is poor. You can take advantage by buying at relatively higher yields (lower price) in the secondary market. There is the added advantage of tax efficiency in preference shares; dividends are tax-free in your hands. In case your dividend in a year from equity and preference shares is more than ₹ 10 lakh, you will have to pay tax at 10% on dividends on the incremental amount.