How to invest in NCDs and Bonds?

by Manshu on July 21, 2011

in Fixed Deposits

This is another post from the Suggest a Topic page, and this time we’re going to take a look at Swaroop’s question on how you can buy bonds or NCDs (Non Convertible Debentures).

NCDs list on the stock market, and like shares and mutual funds, you can either buy them before listing, or you can buy them from the stock exchange after they list.

How to buy NCDs before they list?

1. Buy them online: In a lot of cases – online brokers like ICICI Direct, Sharekhan, Edelweiss etc. allow you to apply for NCDs from their websites.

Applying for them online is convenient, and will probably be the first choice for most people. However, there is no guarantee that every online broker will have the option available right on day 1, and in case the bonds are being allotted on the basis of first come – first serve, this will make the difference in case of over – subscription.

If you are interested in buying them online then keep an eye on your broker’s website to see the announcement for availability of these bonds, and check that frequently.

2. Apply offline through a bank: This is probably the most popular method of buying NCDs, and involves the good old way of filling up an application form, writing a check and then submitting it in a collection center or a bank.

It’s a good idea to do this on the first day of opening of the issue because of the first come first serve thing I mentioned earlier, and you need to get the receipt and the application number because when the bonds are allotted later on, you will need the application number to check the allotment status online.

3. Approach a financial adviser: If you think you’re going to be investing a large chunk of change in these bonds, and others to come later on in the year, then it might be worth your while to get some professional advice and approach a financial adviser who can consult you on current and future NCD issues, and assist you in getting the bonds.

These are three ways in which you can buy bonds before they list on the stock exchange. Buying them during the offer period ensures that you get them at par value, and don’t have to pay extra if they list at a premium later on.

After NCDs list, you can buy them from the stock exchange through your broker.

How to buy NCDs after they list?

Usually, a company issues NCDs with differing maturities, and cumulative, and annual interest option at the same time. If you have a bond issue with two maturities, and a cumulative and annual option then this translates into 2 x 2 or 4 options for the investors, and these list separately on the market.

Since retail bonds or NCDs are a relatively new product, there aren’t a whole lot of volumes on them. In fact, you will see many NCDs that have zero volumes for the day or as far out as a week or sometimes even a month. In cases, where you do see volumes, the spread might be high.

Therefore it’s important for you to place limit orders, and not market orders while buying bonds, so you don’t accidentally end up paying more than what you wanted.

I’ve never bought retail bonds from the stock market, but I see that ICICI Direct gives you the option to buy them from their Equity tab. If you search for SBI in the “Find Stock Quote” area, they give you a series of listed SBI bonds, stocks and ETFs. You can then go ahead, and select one of the series, and ask for a quote, and see a screen that shows you the trading details, and in the next screen you can go ahead and enter price and quantity etc.

SBI Bond Quote Screen

SBI Bond Quote Screen

The way this is set up right now makes it a little hard for investors, and you will need to know which bonds you want to buy, and is it the same as the one that’s being offered to you.

For example, the screenshot above says it’s the SBI Bonds Series 1, Lower Tier 2, 9.25%Y option. From my older post on the SBI Retail Bonds, I recognize them to be bonds from the last issue. However, there were some names there that I didn’t recognize, and I would have had to do some more research to see which bonds they were, and what were their features.

This is where a knowledgeable broker, or adviser who has done these transactions hundreds of time will come in handy because I certainly don’t know much about this.

Conclusion

Retail bonds and NCDs that list on the market are here to stay, and will pick up popularity as more and more of these are issued, and more people get used to the idea of of buying bonds from the stock market. With time, there will be a lot more information, the volumes will be high, and things will hopefully be a little simpler as well.

It’s good for us to see this market evolve and learn the nuances, so that we have an edge when the market matures and stabilizes in a couple of years.

{ 5 comments… read them below or add one }

juanita August 4, 2011 at 1:35 am

But are they safe? Even if the trustees are nationalised/or reputed private sector banks there is no guarantee for repayment of deposits. I have had a bad experiece with DSJ Finance where
ICICI Bank was the Trustee as also Synergy financial Exchange where the Central Bank of India were Trustees. They have simply washed off their hands o any liability. Most of us rely on the
reputation of the Company or the Trustees but it doesnt get us anywhere.

Reply

Manshu August 5, 2011 at 4:01 pm

It depends on who you are investing with. There is such a wide range of companies that offer them that you can’t generalize and say all of them are safe or all of them aren’t. NCDs from Tata Motors or SBI are certainly a lot more safer than other smaller companies like you mention.

It’s definitely better to avoid temptation of one or two extra percentage points, and invest with only the bigger names.

Reply

juanita August 11, 2011 at 11:18 am

Take Shriram finance for example, they seem to be more in the nature of PONZI schemes- merely to finance redemption of earlier deposits..their prospectus also says so. One needs to be vigilant and not get carried by the high rate of deposits. All investors are not savvy, they go by the popularity of the name and the interest pay-out. The credit rating of Shriram Finance oo has been downgraded.

Reply

V.K.Gupta September 11, 2012 at 6:50 pm

HIGHLY KNOWLEDGABLE & INFORMATIVE. THANKS

V.K.Gupta

Reply

austere May 28, 2013 at 1:15 pm

Very useful. the NSE site has a very nice list of NCDs and YTMs.
Now only to figure out where this will work on the ICICIdirect site.

Reply

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