Investing In Corporate Bond Without Liquidity Hurdles
The evolving horizons of investments in India demand breaking traditional restrictions as they hinder investment decisions. For example, investing in a corporate bond with rigid liquidity rules can restrict the freedom of investors. However, corporate bonds are an instrument that can potentially cater to varied investment objectives of Indian investors along with security benefits if such hurdles are removed.
Read this blog to explore the significance, mechanism and benefits of investing in flexible corporate bonds available in the secondary market for better liquidity.
Traditional Bonds Felt Like A Trap
The corporate bond market in India is expanding at a significant rate. Their contribution in the total bond market has been growing rapidly. Innovations like flexible corporate bonds can fuel this growth.
Source: NSE1
As per the Securities Exchange Board of India (SEBI) data for April-December 2024, the corporate bonds market has surpassed the mark of US$ 602 billion. It contributed more than 22.3% to the overall bond market.
Lack Of Liquidity
However, owing to the large retail population and youth concentration, this market has not yet tapped its scope. One of the key reasons for the same is the lack of features aligning with the objectives of investors. For example, the liquidity of the corporate bonds, complex instrument structure, lack of awareness among investors and stipulated maturity norms. The lack of available investors can impact the bond selling process, price and capital gains.
Early Exits
Bonds are termed for varied maturity periods from short-term to long-term. However, stipulated corporate bond liquidity can create financial and investing hurdles for investors. It blocks their funds for the period, which results in investors facing financial crunch in emergencies and losing potential investment opportunities.
Moreover, in case of early exits, no specific penalty is decided by the regulator but investors lose capital gains, may incur brokerage charges or increase tax implication (due to short-term capital gains). Ultimately, it affects their overall financial management.
New Era Of Bond Investments: Shift Towards Flexibility
The times are changing for almost all the asset classes in India. Investors are more informed and open to innovative investment options. Therefore, flexible corporate bond market liquidity can be an attractive option. These are bonds without lock-in restrictions and with an easy early exit process, usually listed on secondary markets. Investors are free to sell the bonds before maturity without incurring high financial loss.
The shift towards flexible corporate bonds is shaping the secondary market. The corporate bonds have significantly contributed to the overall market. As of March 28, 2025, the traded value of corporate bonds on National Stock Exchange(NSE) is INR 8,977.04 crores with 1650 number of trades2.
The four key reasons for this potential shift are:
1. Demand for Liquidity: Investors seek to diversify their portfolios with assets that can be encashed as per the need. Long lock-in periods in corporate bonds may discourage them. Therefore, they seek flexibility through corporate bonds in the secondary market.
2. Technological and Financial Innovation: These days, financial innovation has brought multiple unique investment opportunities to the market. Hence, in comparison to companies selling bonds with rigid liquidity or lock-ins, investors explore flexible bonds that suit their liquidity requirements. Moreover, a key purpose of exploring other investment opportunities with financial innovation can be served with easy liquidity in the portfolio.
3. Regulatory Enhancement: The Indian corporate bond market has significantly benefited from the recent regulatory relaxations for the corporate bond market. Reducing minimum investment to INR 1,000, electronification of the secondary corporate debt market through the ‘Request For Quote’ (RFQ) platform, online price discovery, and much more have been instrumental in assisting the shift3.
4. Online Bond Platforms Providers (OBPP): Apart from stock exchanges, online bond platform providers are also a key avenue for buying and selling corporate bonds flexibly.
Sell Anytime: How It Works And Why It Matters
Flexible corporate bonds are usually instruments with an option to sell corporate bonds early before maturity. This option is also referred to as the ‘put option’. Apart from this, corporate bonds can be sold early through the stock exchange, registered online bond platforms and buyback programmes of the issuer.
Mechanics Of Selling a Bond Early Before Maturity
Buying and selling corporate bonds in the secondary market can help investors simplify the process. Investors register their profile with a demat account on bond platforms like Grip Invest or stock exchanges. These platforms also provide ‘Sell Anytime’ feature.
Instant Price Discovery
Initiatives of SEBI, like the RFQ platform and liquidity window facility along with secondary bond platforms, have further simplified the mechanism of bond liquidity with flexible corporate bonds4. They help in providing real-time market data for price discovery and market support.
Faster Settlement
Due to available buyers in these secondary markets, their requests can be processed in less time and investors can liquidate their bonds with ease. It also speeds up the settlement process without waiting for months.
Why Every Investor Needs Liquidity?
Flexible bonds with simplified liquidity norms are suitable for investors with a need for funds or a short-term investment horizon.
1. One of the key beneficiaries of liquidity in secondary markets for corporate bonds are the retail investors. Usually, a part of their portfolio seeks high liquidity to meet their short-term aspirations or emergencies. Flexible bonds can suit this liquidity need.
2. Efficient financial management for almost all types of investors includes the emergency funds creation. Flexible corporate bonds available in the secondary market can become part of this fund. It can help easily process the emergency exits.
3. Moreover, flexible bonds on the secondary market can also help investors short selling corporate bonds. It can help these strategic investors to rebalance their portfolios or capitalise on market opportunities.
How To Integrate Flexible Bonds In Your Portfolio?
Investors can integrate flexible bonds in the following ways:
1. Online bond platforms are a potential avenue for investing in corporate bonds. Similarly, helps sell bonds, discover prices and minimise the early exit losses significantly.
2. Stock exchanges like NSE and Bombay Stock Exchange (BSE).
3. Corporate bonds with put options, which can provide a liquidity window monthly or quarterly.
Conclusion
The liquidity of corporate bonds is a crucial consideration for investment decisions. Lock-in periods and high loss early exits can hinder this decision. Therefore, investors are shifting towards flexible corporate bonds. It can be simplified through online bond platforms and other secondary markets.
Log in to Grip Invest and start your seamless investment journey in corporate bonds with no lock-ins today!
Frequently Asked Questions
1. How do liquidity-enhanced bonds compare to traditional bonds?
Bonds with better liquidity, no lock-ins and less rigid early exit norms can benefit modern investors more than traditional bonds. They help them create emergency funds, tap better market opportunities, implement strategic investment decisions, and more.
2. How do you measure bond liquidity?
Some indicators like trading volume, bid-ask spread and maturity or redemption norms of a bond can be used to measure its liquidity. Bonds with no lock-in, maturity restrictions, fewer early withdrawal losses and high demand in the market can be considered highly liquid.
3. Are there any risks associated with selling bonds early?
Some issuers can charge withdrawal maturity for selling bonds early. This cost affects the overall returns from this investment. Moreover, in the case of lacking market volume and demand investors may not be able to sell bonds early.
References
1. National Stock Exchange Of India, accessed from: https://nsearchives.nseindia.com/web/sites/default/files/inline-files/NSE_Assocham_Corporate_Bond_Report_2024.pdf
2. National Stock Exchange Of India, accessed from: https://www.nseindia.com/report-detail/cbm-trades-archives
3. National Stock Exchange Of India, accessed from: https://nsearchives.nseindia.com/web/sites/default/files/inline-files/NSE_Assocham_Corporate_Bond_Report_2024.pdf#page=25
4. Securities And Exchange Board Of India, accessed from: https://www.sebi.gov.in/legal/circulars/oct-2024/introduction-of-liquidity-window-facility-for-investors-in-debt-securities-through-stock-exchange-mechanism_87674.html
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