Why and How to buy bonds from the CapitalMind Bond Desk
The 'Introduction to Bonds' post provides a start-from-the-basics view of why bonds as an asset class might make sense for retail investors.
Assuming you now know whether or not bonds make sense for your portfolio
How can you buy bonds, in general?
And should you buy them from us (CapitalMind Bond Desk) at all.
This posts answers these questions plainly and simply. If any of this is unclear, do write to bonddesk [at] capitalmind [dot] in to clarify.
First, How to buy bonds in India?
excerpt from a capitalmind.in premium post reproduced here
How Can I Buy A Bond?
There are a number of bond offerings that come for the “first” time. These typically are bond offerings sold by brokers and banks. You might have gotten mails about Tax-Free bonds, SBI bonds and so on, and all those are “primary” issues – where you pay money to the issuer (like NHAI, REC and companies of that sort) and you get bonds from them.
Here they might say pay me Rs. 1000 and you will get 7.6% interest a year, which is Rs. 76. Easy to calculate – you find out what you want to invest, divide it by 1000, and that’s the number of bonds you want and you will get 7.6% in them.
But let’s say you want to look at interesting bonds right now available in the “secondary” market. That is, you’re not going to buy from the issuer, but from another holder who wants to sell. The issuer plays no part in this, but you get to buy bonds even if you’ve missed the “primary” window.
First, you go to this link on the NSE. There are a number of bonds listed there, most of which aren’t traded every day. Liquidity is a big problem, so you first hunt for bonds in which there are enough buyers and sellers.
Second, you find a bond that has the kind of liquidity and return that you want. Let me now explain. Take the example of this bond – it’s a Shriram Transport Finance Bond which:
Matures on 31 July 2016
Pays out Rs. 1364 on 31 july 2016 (if you are an individual) and Rs. 1318 (for companies or institutions) – I found that information here, searching for the ISIN.
The bond seems to have some sellers: look at the sell side and you see about 1.3 lakh rupees available to buy at Rs. 1303. Second, the bond’s bid-ask spread (best buy to best sell) is just Rs. 2, which is decent. You will see much wider spreads on other bonds.
Calculating the Return
How much would you make if you bought this bond?
To find out, consider that:
You pay Rs. 1303 today, on 10 March 2016. (Consider the best sell price is what you can buy at)You receive Rs. 1364 on 31 July 2016That’s 4.68% in 143 daysAnnualized, that’s a return of 11.9%
Which is pretty good – it works out to a return of 8.3% post tax (assuming a tax rate of 30.9%)
If you buy at 1301 (that is, you place an order and hope the seller will give it to you at 1301) you can bump up your return to 12.4%.
This yield changes every day; the same bond, one week later, will see the 1303 price have a yield of 12.6%, and two weeks later, 13.3%. (Because the number of days to maturity reduce)
The important thing to note is: Will Shriram Transport Finance default on its loans? By July 31? If the answer to that looks like “no”, then this bond is a decent one. If it looks shaky, then you don’t want to invest.
How To Buy?
In any brokerage, you might not get access to these instruments easily. But where you have ODIN-Diet, NEST or a terminal, you should be able to:
Select the series “NY”
Then select the instrument “SRTRANSFIN”
You should be able to add this to your quote list or watchlist now
Buy and place a limit order at the price you need.
The bond sits in your demat account. Many brokers like Zerodha (You can open an account here) offer such trades for FREE (though there are demat charges on the sell side when you exit).
The interest and principal repayment is paid directly to your bank account. Typically the money comes in a couple days after the record date. This can skew your calculations, so please keep a margin of error.
While this was an introduction – and some of you might like those 11.9% returns – remember that buying bonds introduces you to different risks. Some are:
Interest rate risk: if the RBI decided to RAISE rates, then the prices of these bonds will fall. A lower price means a higher yield, so to get the higher yield (reflecting RBI’s change in rates) we will see lower prices and the bond price will fall.
Liquidity: there isn’t always enough liquidity to sell. So don’t buy and hope to be able to exit when you want.
Credit risk: Who thought Jindal Steel would default? But they did. And while Shriram Transport should not, it might. Then, you might have to settle for a big loss because the fear is that they won’t pay back the money.
Structure risk: There are other issues with a structure of the bond. Some bonds pay lesser interest if you are an institution, and higher if you are an individual. Some change the interest rate they pay if you own Rs. 10 lakh or more of their bonds. This structure is known at the start, but you should be aware of them at the point of buying. I call this structural risk because people tend to buy on juicy yield numbers only to understand this later.
We’ll look at some of these in later chapters, but we hope this helps build your understanding of how to buy bonds online. Now, in the next part of this tutorial, you will see how to buy a bond that is longer term and pays interest on a regular basis. (What we saw here was a single purchase and exit within 143 days – let’s see calculations of how it will work for a 5 year interest paying bond).
end of premium post excerpt
When should you NOT buy from the CM Bond Desk?
The bonds you want are liquid, with minimal spreads between Bids and Asks, and available on the exchange at your required yield and quantity. In such cases, instead of coordinating with us, just buy on the exchange.
Why buy bonds from the CapitalMind Bond Desk?
The excerpt above tells you how to buy bonds from the exchange. Your regular trading account with zerodha, icicidirect, hdfc securities lets you buy bonds just like you would any stock / future / option.
So, how does buying from the CapitalMind Bond Desk help?
The section above shows a screen-shot of a fairly liquid bond where the bid and ask prices are close. However, most bonds have considerable spreads on most given days.
This is a screenshot of the bid and ask spread for a Manappuram Cumulative Bond maturing in Nov 2025.
There is a 20% spread between the highest bid and the lowest ask price. The two prices ₹ 925.05 / bond and ₹ 1,111 will give you yields of 13.11% and 9.85% respectively on your investment. That's a massive difference for a fixed income security.
If you set out to buy the bond at a minimum yield of say 10.50%, you have no way of knowing if your order will be filled.
The CapitalMind Bond Desk removes this uncertainty and offers bonds at a specific price valid at least for the day with a clear yield against each bond.
Another example of the open orders on an IDFC First Bank bond.
No sell orders on the market. If you wanted to buy this bond, you would place a buy order and hope a matching sell order for your required quantity would be placed at some point.
The CapitalMind Bond Desk coordinates with you to log in and places a Sell order for your required quantity at the published price. No uncertainty of whether you will get the bonds or the price you will get them at.
But what if the CapitalMind Bond Price List quotes a price higher than the lowest Ask? For example in the Manappuram example, let's say you wanted to buy 100 bonds, our price was ₹ 1,115, and there was a lower offer at ₹1, 111?
In this rare case, you would place a buy order for 100 bonds at ₹ 1,115. Your order will be filled first by the bonds at the lower price ₹ 1,111 and the remaining 50 from our desk at ₹ 1,115.
Transacting on the exchange ensures you get lower prices, if any at the time, even if they're not from our desk.
To summarise :
When you transact with the CapitalMind Bond Desk, you buy bonds through the exchange. Just like you would buy any bond / stock. This ensures you get the lowest prices.
This also means you need an online trading account to be able to buy bonds from us
You know the yield you are buying at. You get the required quantity of bonds at the price published here: https://www.buybonds.in/bonds-for-sale. No surprises.
Write to us at bonddesk [at] capitalmind [dot] in with your questions.