Time to look at better yield in bonds available in secondary market

In this low interest rate environment, primary issuance of bonds has been far and few. While getting an inflation beating yield with reasonable safety rating is always the desire of average investors, in the absence of primary issuances and very low rates of bank fixed deposits owing to huge liquidity in the financial system, investors are shifting towards bonds available in secondary market. In this segment, perpetual bonds of banks, predominantly large PSU and large private sector banks have emerged as an investment vehicle that offers superior risk adjusted returns with adequate liquidity.

As the name suggests, this is a bond without a maturity date. Many perpetual bonds, however, have a call option that allows the issuing company to recall them after a few years. Note that the option to recall lies with the issuing company and not the investor. Nevertheless, since perpetual bonds are secondary bonds that trade in stock exchanges, an investor in need of his principal money can sell these bonds on the stock exchange.

Both government and private entities issue these bonds to fund their long-term capital requirements.

The yield in these perpetual bonds are attractive among fixed income instruments. In addition, these bonds have good credit quality. Just like any other debt instrument, the longer the call date of these bonds, the higher the yield. 

For instance, yield on SBI's perpetual bonds with a call date on November 2024 stand at 7.14%. Similarly, some of the reputed lenders such as HDFC Bank and ICICI Bank offer 5.5-6.5% annual yield on their perpetual bonds having a call option in the next 18 months. Here are some examples:

Note - This is an indicative list. The quotes may change by the time of publishing this article. 

Safety and availability

While concentration risk remains if you recommend these instruments, you can considerably reduce credit risk by opting for high quality debt instruments. Further, these instruments are called quasi equity, which means they are safer than equities. In case the organization winds up then the investors in perpetual bonds will be paid before equity investors.

To invest in these secondary bonds, you need a broker like JM Financial Services Ltd to facilitate the purchase of secondary bonds for your clients. All your clients need is a Demat account. And irrespective of their city or state within India, they can invest in these securities.

Minimum ticket size for perpetual bonds issued before October 2020 remains Rs 10 lakhs, however post the regulatory change minimum ticket size has been enhanced to Rs 1 cr. 

Taxation

The annual interest payment from these perpetual bonds will be added to the total income of the investor and taxed as per the income tax slab of the investor.  Whenever these bond are sold in secondary market by the investors, they will accrue Capital Gains (loss) depending on the holding period. Long Term capital gains tax will be applicable to all securities sold after holding it for 366 days and many times returns become more tax efficient.

Benefits

• Superior risk adjusted returns post taxation
• Reliable and sustainable income supplement
• Adequately liquid investments
• Diversify investment portfolio as it offsets riskier investments

Some of the bonds currently available for investment through JM Financial Services are as follows:

• Bank of Baroda
• Cholamandalam
• HDFC Life Insurance Company Ltd.
• ICICI Bank
• Punjab & Sind Bank
• Punjab National Bank
• State Bank of India
• Tata Capital Financial Services Ltd

*Arranged alphabetically

If you wish to empanel with JM Financial Services as Independent Financial Distributors to solicit these products, click here

If you wish to invest in these products, click here