Listed Bonds Vs. Unlisted Bonds: A Comprehensive Comparison
Introduction
In the modern world of innovative financial instruments, investors can often be at odds with making an investment decision. The process can be simplified by thorough analysis. Debt instruments are gradually gaining popularity in India. It can be a suitable time for investors to understand its type, differentiate and analyse the suitability for these investments.
Usually, listed bonds are popular due to their widespread availability. However, investors with a high-risk appetite can also benefit from unlisted bonds investment. This blog explores listed and unlisted bonds in detail, compares them and can help investors select the best bonds to invest in India based on their suitability.
What Are Listed Bonds ?
In India, financial securities are regulated by a central statutory body: the Securities Exchange Board of India (SEBI). Listed bonds are securities issued by entities to raise debt by listing them on the exchanges. Listed bonds in India can be traded on these exchanges or recognised bond platforms.
Due to the safety feature, these bonds are open to a wide investor base. Moreover, its credit rating is higher than unlisted bonds. Bond returns may vary based on the type of listed bond.
Advantages And Disadvantages Of Listed Bonds
Advantages of Listed Bonds | Disadvantages of Listed Bonds |
Listed bonds offer higher liquidity due to their presence on stock exchanges. It fulfills the emergency requirements and provides funds for other opportunities. | Fees and commissions associated with trading listed bonds can erode investment returns. |
Investors can access real-time price information and trading volumes. | Due to stock market listing, market volatility may affect the investments. |
They are subject to stringent regulatory requirements, including credit rating, financial reporting, and disclosure norms. | Listed bonds lose in the bond returns comparison against unlisted bonds due to preference for safety. Also, their returns may lag in comparison to inflation effects. |
They provide capital protection support for a long-term investment. | Some listed bonds have rigid liquidity rules and are subject to high short-term tax. |
Taxation
The capital gain tax on listed and unlisted bonds differs based on their holding period. Every listed bond period has a holding period of 12 months to categorise as a short-term investment.
Short-term listed bonds (held for less than 12 months) | Long-term listed bonds (held for 12 months or more) |
Applicable income tax slab rate | 12.5% without indexation |
Source: Central Board of Direct Taxes1
Apart from capital gains, the interest earned from listed bonds is remitted after a deduction of 10% of the tax deducted at the source (TDS) if this amount exceeds INR 10,0002. However, some exemptions are also allowed as follows:
1. Section 54EE of the Income Tax Act, 1961, allows investors to claim an exemption on long-term capital gains earned from other investments. This can be done by investing in government-notified funds that finance start-ups3.
2. Moreover, Section 54EC of the Income Tax Act of 1961 allows investors the exemption of long-term capital gains from land and buildings (held for the long term) if invested in specific bonds4. These are listed bonds issued by government institutions like the National Highway Authority of India or Rural Electrification Corporation Ltd.
Who Should Invest In Listed Bonds?
A key benefit of listed bonds is their regulatory backing, which provides safety. Therefore, investors willing to reduce their bond investment risks and who prefer capital protection may find listed bonds suitable. Moreover, investors willing to diversify their portfolios can also explore this investment. The listing benefits expand the scope for investment to retail investors and beginners.
What Are Unlisted Bonds ?
The bonds not listed on any exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) are termed unlisted bonds. These are offered through a private placement or Over-The-Counter (OTC) markets. Due to no regulatory authority, the unlisted bonds investment is highly risky in nature.
These bonds may also be issued by early-age firms and startups, which increases the risk. However, high-risk also increases potential bond return levels.
Advantages And Disadvantages Of Unlisted Bonds
Advantages of Unlisted Bonds | Disadvantages of Unlisted Bonds |
Unlisted bonds generally offer higher interest rates than their listed counterparts due to their high-risk nature. | Finding buyers at the desired price level can be tough in the unlisted bond market. This issue of liquidity in bonds can block funds in undesired investments. |
Investors get the opportunity to diversify their portfolios with unlisted bonds. | Due to less regulatory oversight, unlisted bonds may need more information, making it harder for investors to assess credit quality and risk. |
Due to a lack of middlemen, established platforms or regulatory compliances, the overall investment cost may be reduced. | The high risk of these bonds may result in lower credit ratings, which can affect capital protection. |
Also, explore this unique listed alternative: What Is LeaseX? Grip's Rated & Listed Investment Option
Taxation
The taxation of an unlisted bond investment is fixed at the applicable slab rate of the investors, irrespective of the holding period. The tax on listed and unlisted bonds can become a crucial factor for investment decisions.
For example, if an investor earns INR 1.5 lakhs from corporate bond capital gains, it is charged at the tax slab applicable for his/her total taxable income. Suppose, this income is INR 9 lakhs the tax would be 10% for FY 2025-26. Therefore, the capital gains tax will be INR 15,000 (INR 1.5 lakhs*10%)5.
Who Should Invest In Listed Bonds?
Unlisted bonds are unique investments and investors with potential risk appetite may find it suitable. Usually, institutional investors are capable of investing in these bonds due to their high-risk capacity. Apart from this, retail investors with suitable risk appetite can also diversify with unlisted bond investment and earn potential yields for their portfolio.
Listed Vs Unlisted Bonds: A Brief Comparison
Some key aspects differentiating listed vs unlisted securities can help understand them in detail.
1. Issuer Type
The listing technicalities and regulatory control differ from the issuing entity for the bonds. The listed bonds are usually issued by a government, companies and other established entities. However, unlisted bonds are free of regulatory restrictions. Therefore, early-age entities, startups and private firms seek debt funding through them.
2. Credit Risk
The creditworthiness of a bond is indicated by the credit rating. Due to the safety of SEBI regulations for bonds in the listed category, the credit rating for these bonds is high. However, in unlisted bonds, the risk of new or private firms can be high due to less information available, which can lower the credit rating.
3. Liquidity
The liquidity in bonds is one of the most crucial aspects for investors to make investment decisions. The credibility of the listed bonds increases their liquidity in the market. On the other hand, unlisted bonds have a confined market space. Further, private placements can limit the liquidity.
4. Secondary Market
These are marketplaces facilitating bond liquidity. For listed bonds, the buyers are active in these markets and real-time price variations can be tapped. However, for unlisted bonds, there are limited buyers, and OTC markets may lack transparency.
5. Yields
It is a crucial point for listed vs unlisted securities. The listed bond may earn lower yields than unlisted bonds. However, the volatility of these yields may be higher in the unlisted bond investments.
6. Regulatory Oversight
Listed securities follow the framework and SEBI regulations for bonds. However, unlisted bonds are not directly in the scope of SEBI.
7. Tax Considerations
The tax for listed and unlisted bonds differs by the holding period of investors. If listed bonds are held for less than 12 months, their gains are taxed at the income tax slab rate of investors. If the holding period is 12 months or more, the tax is 12.5%. On the other hand, unlisted bonds are taxed at the income tax slab rate irrespective of the holding period.
8. Investment Opportunities
Government bonds, corporate bonds, tax-free bonds, and many more are offered under the listed category. Unlisted bonds only include the private firms offering investment opportunities.
9. Trading Costs
The fees regarding account maintenance, trading, regulatory compliance, and more can add to the investment cost. However, in unlisted bonds, due to a lack of middlemen, only minimal costs are charged.
Unlock Liquidity With Grip’s Sell Anytime Feature
Traditionally, bond investments require long-term commitment, restricting liquidity and making early exits challenging. To address this, Grip Invest has launched the Sell Bonds Anytime feature, enabling investors to exit their bond holdings before maturity with ease.
After a short 2-month lock-in period, investors can list their bonds for sale and receive competitive market-driven offers from multiple buyers, ensuring transparent price discovery. The entire process is fully digital, with settlements completed within one business day, making bond investing more flexible and accessible. By introducing this feature, Grip Invest enhances liquidity in fixed-income investments, giving investors greater control and financial flexibility.
Choosing The Right Type Of Bond For Your Investment Needs
When it comes to investing in bonds, there are various factors that you need to consider to ensure you make the right decision. Here is a detailed guide on key factors to help you choose the best type of bond to meet your investment needs.
- Risk Profile: Understanding your risk tolerance is essential when selecting a bond. Different types of bonds have varying risk levels. For instance, government bonds are considered low-risk investments, while corporate bonds have a higher risk factor. High-yield or junk bonds carry the highest risk but offer potentially higher returns. Assess your risk tolerance and choose a bond that aligns with your comfort level.
- Investment Horizon: Your investment horizon, or the time you plan to hold the bond, is another crucial factor. If you require liquidity in the short term, consider investing in bonds with shorter maturities. Long-term investors, on the other hand, may opt for bonds with longer maturities to benefit from higher yields. Remember that the longer the maturity, the more sensitive the bond price will be to interest rate changes.
- Transparency and Regulatory Oversight: The bond market can be complex, and regulatory oversight ensures the transparency and fairness of the market. Government bonds have the highest level of transparency, as they are issued and regulated by national governments. Corporate bonds are also regulated, but the level of oversight varies depending on the issuing company's size and credit quality. Ensure you are comfortable with the transparency and oversight of your bond.
- Diversification: Diversification is a critical element in reducing the overall risk of your investment portfolio. Investing in various bonds from different issuers, sectors, and regions can minimise the impact of any single bond's poor performance on your overall returns. Consider adding a mix of government, municipal, and corporate bonds to achieve a well-diversified bond portfolio.
- Credit Quality and Risk: Credit quality refers to the bond issuer's creditworthiness. Bonds with high credit ratings, such as those issued by the U.S. government or highly-rated corporations, are considered safer investments. Lower-rated bonds carry a higher risk of default but may provide higher returns. Evaluate the credit quality and risk of the bond and ensure it aligns with your investment objectives and risk tolerance.
- Returns and Taxation: Consider the potential returns and tax implications of the bond you choose. Government and municipal bonds usually have lower yields but may offer tax benefits. Corporate and high-yield bonds generally have higher yields but may be subject to higher taxes. Be sure to understand the tax implications of your bond investment and consult with a financial advisor if necessary.
By evaluating these factors, you can make a well-informed decision that aligns with your investment goals and risk tolerance.
Conclusion
The classification and comparison of listed vs unlisted securities can help in informed decision-making. Listed bonds allow a safer investment with moderate bond investment risks. However, unlisted bonds can offer higher yields. Investors can determine their suitability and diversify their portfolio with a mix of listed and unlisted bonds.
Explore the world of such unique bond investments by logging in to Grip Invest today!
Frequently Asked Questions
1. Which is safer: listed or unlisted bonds?
Due to regulatory support and established marketplace support, listed bonds are safer than unlisted bonds. Moreover, the lack of transparency adds to the risk of unlisted bonds. However, preference for these bonds depends on the profile of investors.
2. Can I sell unlisted bonds before maturity?
Yes, unlisted bonds are sold in an OTC market. However, the liquidity can be low on the OTC market to sell at the desired price and time. Moreover, the middleman, like a broker, can also charge a commission to sell at the required rate.
3. How do credit ratings impact bond safety?
The credit rating of a bond is assigned after determining the financial position, nature of debt and repayment capacity of the issuer. Therefore, a bond is rated high for its high safety through these criteria.
4. Are unlisted bonds only for institutional investors?
No, all unlisted bonds are not only for institutional investors. Retail investors can also buy them from OTC markets. However, some unlisted bonds are privately offered to institutional investors and are unavailable for retailers.
5. How do interest rates affect bond investments ?Usually, bonds with high interest rates also have a high risk. Therefore, investors with a suitable risk appetite are attracted to earn high returns. However, investors preferring safety may earn moderate to low returns from their low-risk investments.
References
1. Income Tax India, accessed from: https://incometaxindia.gov.in/Documents/Left%20Menu/HUF-Income-from-capital-gains.htm
2. Income Tax India, accessed from: https://incometaxindia.gov.in/Pages/Deposit_TDS_TCS.aspx
3. Income Tax India, accessed from: https://incometaxindia.gov.in/Documents/Left%20Menu/HUF-Income-from-capital-gains.htm
4. Income Tax India, accessed from: https://incometaxindia.gov.in/Documents/Left%20Menu/HUF-Income-from-capital-gains.htm
5. India Budget, accessed from: https://www.indiabudget.gov.in/doc/memo.pdf
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