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Fixed Income

Bond Baba gets a desk

bonddesk-1.jpg

Bond Baba gets a desk

If you have been a frequent visitor to Capitalmind, you already know we like bonds. Low volatility relative to stocks, a variety of term structures to  match specific income needs, and the opportunity to optimise taxes are some reasons why. 

So why haven’t bonds been a regular feature of most retail investor portfolios? Three reasons.

  1. Shallow Corporate Bond market. In most emerging economies, mobilisation of capital through bonds accounts for between 15% and 50% of GDP. In India, that number is only 5%
  2. Most bond placements are private. Almost 90% of all bonds issued don’t appear on the retail investor’s radar, and go directly to institutional investors
  3. Understanding Fixed Income Returns. No easy way to understand how much a bond will “yield” and how safe it is, given the many different varieties of debt that can be issued through bonds. 

The latest budget, for all the mayhem it created with taxes, did state the government’s intention of trying to deepen the bond market with steps like setting up a Credit Guarantee Enhancement Corporation, and allowing AA-rated bonds as collateral with stock exchanges

But…

Should you buy bonds? 

Can you buy bonds?

Is this even a useful thing to have?

Should I Buy A Bond?

Typically, you would think of fixed deposits as what it means to earn interest from your money. But they’re tax-inefficient. You pay tax on the interest earned, at your highest tax bracket, even if you don’t need the interest.

Or, you could buy a mutual fund. That’s great, but too many times, we’ve found their returns to be less than ordinary. They are super tax efficient, of course, because you don’t pay tax on them until you sell them. But they are relatively lower in returns and aren’t as flexible. 

But what if you wanted:

  • A very long term bond (20,30 years) which guaranteed payout of a certain amount every year, regularly. No mutual fund will provide this with a guarantee. FDs don’t even go beyond 10 years Government bond, long term
  • A high interest paying “deposit” that will pay you more than a fixed deposit or indeed, a mutual fund, but have low levels of risk → Bond from a bank, at a high rate
  • Parking of money for a specific time – say 2 years. A mutual fund is inefficient and volatile. A fixed deposit is highly taxed → Targeted maturity bonds

Introducing: The CapitalMind Bond Desk

What: 

It’s simple. We offer a select quantity of bonds of varying term structures of reasonably solid companies for purchase by retail investors as investments.

You can buy these bonds from us.

Why: 

Buying bonds in India as a small investor is a pain. They are nowhere as liquid as stocks of the same companies, especially in small lot sizes. We aim to reduce this uncertainty in being able to buy the bonds you want, when you want, at a clearly stated price. We classify the bonds based on their term structure to clearly indicate for who they work best.

What’s in it for us? We make a few basis points on the spread at which we worked hard to buy those bonds and the price at which we offer them.  You don’t pay anything extra. Our commission is in the price. What you should care about is: “What interest rate am I getting?” (“Kitna milega?”)

How:

This is important. 

  • We will publish a page of bonds, available quantity, with the price at which you can get them from us. Note that the price will be applicable for that day only, and is first-come-first-serve
  • Prices change every day. That’s because in bonds, the interest accrues. So a bond worth ₹ 1,000 that pays 6% interest will see its price go up by ₹ 5 a month
  • In addition to the yield (IRR), we will classify the bonds based on 
    • How long before they mature
    • Does it make sense for a higher-tax-bracket or a lower-tax-bracket investor
    • The relative “safety” of the bond
    • The price you get it at, and the market price you can get it otherwise
    • To say what they work best for (e.g. regular tax-free income for high marginal tax-rate investor, zero-coupon i.e. capital gains deferment until maturity, (relatively) high yield regular income for zero tax-rate investors, and so on) 
  • You then contact us with the bond(s) and quantity you want. We coordinate with you, a window of time in trading hours where you place a buy order at the published price. Our desk places a sell order soon after to complete the transaction. That’s it!

Note: You will buy the bonds on a stock exchange. You never pay us directly. We just negotiate the price and trade on the exchange. 

While we continuously work to make this process as pain-free and friction-less as possible. For now, we don’t want perfect to be the enemy of good. The info-graphic below summarizes the steps to buy bonds from us.

How can Indian investors buy bonds

Important not-so-fine-print

  • The bond desk is not an advisory service. It is a demand fulfillment service. While we classify the bonds based on intended financial outcome for easy reference, we are not doing a personalised assessment to determine if bonds (and which bonds) are right for you.
  • We pick the bonds based on their profile (issuing company, ratings assigned by major agencies), yield, and availability. We do not perform an independent credit-risk assessment, so the risk of the bond is entirely yours.
  • Prices will fluctuate, regularly. You may not get the bonds you want if we’ve run out of them. You may not be able to sell these bonds in the market later because there may be no buyers. Plan to hold to maturity, at least. 

Sign up here if you would like to be added to the Bond Desk Mailing List:

Bond Desk Sign up Form

Further Reading:

For a more elaborate understanding, here are some “Bonds-101” articles:

All those bonds – An introduction (premium content)

Tutorial: How To Buy Bonds Online – The Basics, Part 1

Tutorial: Cash Flow Based Return of Long Term Bonds Available Online, Part 2

Tutorial : Tax Implications and Nuances of Online Bonds – Part 3

 For questions, write to bonddesk at capitalmind dot in