Buying bonds is very simple for retail investors now. With Reserve Bank of India (RBI) introducing ‘retail direct scheme’ in November 2021, small investors can access both primary as well as secondary markets for government securities.
Aside from this, retail investors can now use some niche platforms such as bondskart.com and bondsindia.com, and others. These are very user-friendly and one can buy bonds in small denominations – sometimes as small as ₹1,000. Another advantage of buying bonds at these platforms is that these give improved access. At times, bonds may not be available to investors when they want to buy at exchanges. During such times, one can use these platforms for ready access.
Key factors to consider
There are several factors that small investors need to keep in mind before taking a plunge in the bond market. At the outset, investors ought not get carried away with higher yields, since higher returns are offered at the expense of poorer credit ratings. So, it is vital for retail investors to know that bonds with high rating are safer and those below AA-rating can be given a pass, and all government securities carry sovereign guarantee, so investors do not need to worry about their credit risk.
“When retail investors look at bond market, they only look at the return. On the other hand, investing in equity is far easier. In debt, there is hardly any upside, but downside can be huge. Small investors should stay away from corporate bonds since it involves a lot of analysis, however, there is no problem with government bonds which are far safer,” says Ankur Kapur, Founder of Plutus Capital.
Another key factor that investors need to keep in mind is the bond tenure. Bonds of the tenure ranging from three months to 40 years are available in the market. As the interest rates are likely to harden, the bond yields of long tenure would likely spike. In this impending rate hike regime, small investors are advised to go for short tenure bonds – up to a tenure of 15 months.
“The small investors can take long term bonds so long as their tenure coincides with their investment goal. And they should make sure that they hold these long-term bonds to maturity to avoid losses during to declining bond prices,” says Deepak Aggarwal, a Delhi-based Chartered Accountant and financial advisor.
Flexibility over desire
Some bond buyers look for specific bond products such as tax-free bonds or bonds of a shorter tenure, but they may not be available in the primary market during that time. So, it is advisable to explore the available debt products in the secondary market instead of waiting for the specific bond type in the primary market.
Immediately after the Budget 2022-23, yields of 10-year government securities spiked on high government buying programme. Aside from this, the RBI maintained its accommodative stance during its latest monetary policy meet despite inflation worries. The inflation is likely to trigger interest rate hikes by the central bank in the coming months. In the run up to surging interest rate, bond yields are likely to harden.
So, it is vital for retail investors to weigh all the pros and cons before including bonds in their portfolio.