How to Buy and Sell Bonds in India?

If you want a low-risk investment to provide steady returns, investing in bonds is the way to go. These secure investment options offer an alternative to stocks or mutual funds. Reliability is a major feature of this asset class as it provides regular interest payments and preserves the invested principal. 

The below guide will help you understand the steps involved in investing and divesting from bonds in the Indian market. It will also educate you about the investment strategies involved in buying and selling bonds and the facts you must remember while selecting brokers for bond trading. 

Key Highlights

• Bonds are debt instruments used by borrowers (corporations or governments) to borrow money from retail and institutional investors to fulfil their capital requirements. In return for their investments, the investors receive a fixed interest income and the principal amount of their investment after the bond matures.

• Investors can buy bonds directly from the government, corporations, or the secondary market. Bonds can be traded/sold on the secondary market after assessing the market conditions.

• Various bond investment strategies will help you align your investment with your financial goals.

• While entering the bond market, it is imperative to find the right stock broker so that their fees and commissions affect your investment budget. 

Buy and Sell Bonds in India

In bonds, an investor loans a certain amount to an entity (government or corporation) intending to receive the invested amount back at the bond’s maturity period, along with a periodic interest payment. Investing in bonds is a great way to diversify your portfolio and protect your capital while receiving interest on the invested amount. 

Bonds are less volatile than stocks and are thus the suitable class of investment for investors with a low-risk appetite. They are also an ideal choice for investors who aim to balance their portfolios. In India, government bonds, corporate bonds, and tax-free bonds can be bought and sold in both, the primary market and the secondary market. 

Primary markets are the ones in which the bonds are issued whereas secondary markets are the ones in which investors openly trade the issued bonds. 

How to Buy Bonds?

There are various types of bonds in India such as Government bonds, Corporate bonds, Tax-free bonds, Sovereign Gold Bonds (SGBs) and many more. The below steps will educate you on the various ways you can buy bonds. 

• Buying Bonds on the Primary Market: In the primary market, you can buy bonds directly from the issuer i.e., the government or a corporation, through various channels as mentioned below.
• Government Bonds: The Reserve Bank of India conducts auctions to allow investors to invest in government bonds. 
• Corporate Bonds: Instead of taking loans from the bank at a higher interest rate, corporations issue bonds to raise the required capital. These bonds can be purchased via public bond offers or through banks and financial institutes.
• Buying Bonds on the Secondary Market: If you miss the government bond auctions and corporate initial public offerings (IPOs) for investing in bonds, you can buy them in the secondary market. Bonds are publicly traded on stock exchanges like National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). To buy them, you must first create a Demat account and a trading account with a registered broker who buys bonds listed on the exchange. 

Now you can research the details of the bonds you wish to invest in. A few features that you can check are the face value of the bond, coupon rate, yield to maturity(YTM) rate and maturity date. Based on the demand and the interest rate, the price of the bond may fluctuate. After logging in to your trading account, just place a buy order on the bond you wish to invest in. 

• Online Bond Buying Platforms: Retail investors can directly buy government bonds from several online platforms. The detailed information and the easy-to-understand interface help investors to invest in bonds directly.
• Pool of Bonds: If you do not prefer to research specific bonds, you can always opt for a pool of bonds i.e., bond mutual funds or bond Exchange Traded Funds (ETFs). These can help you diversify your investments.

How to Sell Bonds?

Selling bonds in India is as simple as buying bonds. Here are a few steps to guide you while selling bonds on the primary or secondary market. 

• Selling Bonds on the Secondary Market: Selling bonds that have been bought on the stock market is simple. Follow the below-mentioned steps to sell your bonds.
• Before you sell, you must consider that the value of the bond depends on the market condition, especially interest rates. You must also understand the tax implications before selling your investment.
• After considering all the factors, log in to your trading account. Just as you placed a buy order, you can place a sell order on the bonds you wish to sell. The bond will then be sold at the current market price. 
• Redeeming Bonds at Maturity: In some types of bonds (eg. sovereign gold bonds), on maturity, your principal amount will be directly transferred to your bank, along with the final interest payment. 

Bond Investment Strategies

There are various strategies using which you can invest in bonds and diversify your portfolio. Some of these are buy and hold, laddering, barbell, bullet, immunization, indexing and active trading strategy. Let’s look into a few.

• Laddering Strategy: In this strategy, you purchase bonds with different maturity dates. For eg. buying bonds with 1, 3 and 5 years of maturity. The thought process behind this strategy is that it will help you manage risk and provide a steady source of income at the same time. As each bond matures, you can reinvest the amount to continue a ladder-like investment.
• Buy and Hold Strategy: This strategy is for conservative investors who aim for stable returns and minimal risk. In this strategy, you buy a bond and hold the bond till its maturity date to earn interest income and get back the principal amount upon maturity. 
• Indexing Strategy: In this strategy, you create a bond portfolio that mirrors a specific bond index. The goal of this strategy is to achieve results similar to a bond index. This strategy provides diversification and reduces the need to actively manage your bond investments. 

Selecting the Best Broker for Bond Trading

To have a successful bond investment, it is crucial to select the right broker. Here are some of the factors you must consider while choosing a broker.

• Fees and Commission: The returns of your investment can only be finalised after you take into account the brokerage. So while researching brokers, compare their brokerage fees and select the ones that align the your investment budget.
• User Interface and Customer Support: To make the investment process easier, the broker needs to provide a platform that has a user-friendly interface. Now while navigating through multiple elements of the platform, you may face technical or other types of issues. This is where having good customer support who are available via call, email or chat helps. 
• Research and Insights: A broker often provides research and insights on topics like credit ratings, issuer background, yield comparisons and many more. This will help you to make better investment decisions and thus earn a good rate of return. 

Conclusion

Buying and selling bonds can be an excellent way to diversify your portfolio, secure your investments, and provide an income source. Understanding how the bond market works is important before you invest in government bonds, sovereign bonds, corporate bonds or any type of bond for that matter. Acquiring knowledge of various bond investment strategies will help you to make informed investment decisions. After you do your due diligence, aligning the buying and selling of bonds to your financial goals will become easier.

FAQs on Buying and Selling of Bonds