Unlisted bonds- The better investment alternative?
Unlisted bonds are the obvious underdogs of the bond market. While most people stay away from them due to limited liquidity, some fear the reduced transparency. Even with that being said, several investors consider them as the better alternative to listed bonds. Why? Let’s find out.
Unlisted bonds are forms of debt securities that are not listed on any recognised stock exchange(NSE or BSE). These bonds are traded through the OTC market or over the counter markets, which uses the help of an intermediary or broker for the execution of these trades. In this article, we will discuss everything you need to know about unlisted bonds and why they stand as an equally compelling investment choice compared to listed bonds.
Advantages of unlisted bonds
Here are some of the qualities of unlisted bonds that make it stand out from listed bonds.
The higher, the better:
Unlisted bonds are known to give higher interest rates than their listed counterparts. This is because unlisted bonds carry a comparatively higher risk factor due to their lack of liquidity and transparency. These factors generally thrust the interest rates as a way to compensate for the risks involved.
More for less:
The absence of a middle man like a broker results in a lower issuance cost for unlisted bonds. This form of a direct offering facilitates larger yields, thus multiplying profits.
Diversification:
Investing completely in equity is not perhaps the right approach to build a long term portfolio, therefore, investing in unlisted bonds allows investors to diversify their portfolios beyond the traditional listed market.
Flexibility:
The conditions of purchase when buying an unlisted bond can be modified to match the particular requirements of an investor. They may be offered a variety of maturities, payment intervals, and several other benefits to attract investors.
Listed vs Unlisted bonds:
The decision of choice between listed and unlisted bonds has been the ever-revolving talk of interest in the world of bond investing. Let us look at some of the key similarities and difference between listed and unlisted bonds
In simple terms listed bonds are those that are listed on a recognised stock exchange and any other bonds that aren’t listed on such exchanges come under the category of unlisted bonds.
Both listed and unlisted bonds are legally recognised bonds. While listed bonds follow SEBI regulations 2021 and Companies Act 2013, unlisted bonds follow Companies Act 2013.
Listed bonds are freely tradable on stock exchanges, making them highly liquid. At the same time, unlisted bonds come out as a less liquid asset because they can only be traded on an ORC market.
In the case of taxation, TDS is applicable at 10% on interest for both bonds. LTGC is applicable at 10% for listed and unlisted bonds without indexation for holding bonds more than 12 months and 36 months respectively.
In the case of listed bonds, strict regulatory standards and issuing processes have been set by SEBI to avoid any irregularities, while unlisted bonds are not subject to such complex standards.
Risks with unlisted bonds:
Unlisted bonds are not immune to risk, in fact, they carry a higher scope for it when in comparison to listed bonds. Here are the risks that are involved in an unlisted bonding investment.
Low liquidity
Unlisted bonds are not traded on stock exchanges(NSE/BSE), so it becomes difficult for investors to buy and sell these bonds.
Limited transparency
The lack of a strict scrutinisation makes it difficult for investors to assess these bonds for their credibility and risks.
Credit risk
Unlisted bonds may carry higher credit risk due to their issuance by private companies which may have low creditworthiness than larger, publicly traded entities.
Who can buy unlisted bonds?
These bonds are not issued to the public at large and are usually invested in by large institutional or private investors like asset managers, insurance companies, or HNIs. A retail investor however, can invest in unlisted bonds if he is willing to cope with a minimum investment, which in most cases, is comparatively high..
Conclusion
As they all say, growth is futile without risks. Even though a comparatively riskier option, unlisted bonds have the potential to grow your funds into numbers you can only imagine. However, regardless of which bond you are investing in, being careful about its features and ensuring that it matches your risk tolerance is vital.
If you are planning to take the next step into the unlisted bond market, Tap invest is your one stop destination. Explore curated bonds and tap into the world of your financial freedom today!
FAQs On Unlisted Bonds:
1. What are unlisted bonds in India?
Unlisted bonds are debt securities issued by companies or other entities that are not traded on a stock exchange. They are usually offered directly to investors through an ORC market.
2. Is unlisted bonds risky?
Investing in unlisted bonds may carry risks such as credit risk, liquidity risk, and interest rate risk.
3. How can I buy an unlisted bond in India?
You can get access to an unlisted bond in India through an ORC market like TapInvest.
4. How are unlisted bonds different from listed bonds?
Listed bonds are different from unlisted bonds in terms of issuer, risks, regulations, and costs.
