Buying Bonds Online: Hidden Risks and Unforeseen Consequences

Bond Investing 101: Key Considerations for Online Investors

Key Takeaways

Before investing in bonds online, it's essential to understand the following key concepts:

1. Bond Pricing

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• The price you pay for a bond is not always its face value, especially when buying from the secondary market.
• Always consider yield to maturity rather than the coupon rate printed in bold.
• A bond with a face value of Rs 10,000 might be priced higher or lower depending on interest rates and demand.

2. Interest Rate Risk

• Bond prices fall when interest rates rise, even if you don't sell.
• Longer-term bonds are more vulnerable to interest rate changes, carrying higher risk.
• A ten-year bond carries more risk than a three-year bond, even with a solid issuer.

3. High Coupon Interest

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• A high coupon interest rate is often a warning sign, not a gift.
• Weaker finances, more debt, or business uncertainty may be underlying issues.
• Credit ratings can help, but they are slow to change and may react after damage is done.

4. Selling Bonds

• Online platforms are more geared towards buying bonds than selling them.
• Many corporate bonds have low liquidity, making it harder to sell.
• In stressed markets, you may be forced to sell at a discount or wait longer than planned.

5. Tax Implications

• Interest from bonds is taxed at your income slab, while capital gains depend on holding period and listing.
• Tax-free bonds often trade at higher prices, but platforms may not always show post-tax returns clearly.

6. Platform Risks

• Bond platforms are marketplaces, not guarantors, and do not back your investment.
• If an issuer defaults, the platform is not responsible, and risk is entirely yours.
• Treat bonds like direct investments, not savings products, and be aware of the risks involved.