Secondary bonds have emerged as an efficient investment vehicle that offers superior risk adjusted returns with adequate liquidity in these uncertain times.
Secondary bonds are traded in stock markets. They include instruments like tax free bonds, corporate bonds, public issue of NCDs, perpetual bonds and so on. Let us understand how these instruments can be useful in your clients’ portfolio.
Tax free bonds: These bonds are tax efficient and carry low risks as they are issued by government enterprises. Given that these bonds have not been issued post 2013-14, they are available only in the secondary bond markets.
Currently, these bonds offer around 4-4.5% return, which make it extremely attractive for HNIs and Ultra HNIs who fall under the higher tax slab. It can also be useful for senior citizens who want regular income with minimum risk.
Top corporate bonds: These are debt securities issued by a company in order to raise capital. In the risk-return hierarchy, while high quality corporate bonds are considered riskier than government bonds they are relatively safer and conservative investments. Your clients can include them to offset riskier investments in equities. Retirees across the globe also invest a large portion of their assets in these bonds to avail a reliable income stream and preserve their capital.
Public issue of NCDs: Non-convertible debentures (NCD) are fixed-income instruments. These are usually issued by high-rated companies in the form of a public issue to raise long-term capital. They offer relatively higher interest rates when compared to convertible debentures. After the issuance, these instruments trade in the secondary market and can be availed either at a premium or at a discount from the issued price in the primary market.
Note that NCDs are those, which cannot be converted into shares or equities. Their interest rates depend on the company issuing the NCD. Therefore, higher the interest rate, lower the credit rating and higher the credit risk.
Perpetual bonds: This is a bond without a maturity date. However, many perpetual bonds also have a call option, which allows the issuing company to redeem them after a few years. Note that the option to redeem lies with the issuing company and not the investor. Both government and private entities issue these bonds to fund their long-term capital requirements.
These are suitable for retail investors, HNIs or institutional investors who need a predictable, steady stream of income.
Safety
While concentration risk remains if you recommend these instruments, you can considerably reduce credit risk by opting for high quality debt instruments.
Benefits
Preserve capital
Superior risk adjusted returns post taxation
Reliable and sustainable income supplement
Adequately liquid investments
Offers diversification across asset classes and offsets riskier investments in equities
Earn transaction-linked brokerage of up to 0.5-0.75%
