Investing a part of your income is one of the most crucial decisions one should make. While some people are risk takers, others are risk averse. The people in the former category prefer investing in equities, while the latter prefers investments in relatively safe investment instruments, such as bonds. Bonds are debt instruments that help various governments, corporations, and organisations borrow money from the general public. Investors often ask how to invest in unlisted companies. What these investors need to be aware of is the fact that unlisted companies offer unlisted bonds that have more risk associated with them. These bonds are not generally issued to the open public; they are issued at higher levels, often to companies and big investors, as they have a minimum cap investment.
This blog explores the main differences between listed and unlisted bonds and the related terminology and market mechanisms.
Understanding the Difference: Listed and Unlisted Bonds
Definition
Listed bonds are debt securities used to raise debt from the general public. The listed in their name suggests the guarantee associated with them. They are less risky in nature. Unlisted bonds are those debt securities that are not recognised publicly and have more risk associated with them.
Trading Platform
Listed bonds are recognised as belonging to listed companies and are, therefore, traded via the Bombay Exchange of India(BSE) or the National Stock Exchange(NSE). Unlisted bonds are traded over the counter privately to a group of selected investors. These include High-net-worth individuals(HNIs) and institutional and family investors.
Who can Invest?
The general public can invest in listed bonds, whereas only a selected few can invest in unlisted bonds. The bond price of listed bonds is transparent, whereas the bond price of an unlisted bond is not. Thus, the fluctuation and a significant investment cap on unlisted bonds make it difficult for the general public to invest in them.
Level of Liquidity
Listed bonds are relatively more liquid than unlisted bonds. Liquidity refers to the ease of converting these bonds into cash. This is because listed bonds are registered on the market, whereas unlisted bonds are not. Trading over a dedicated platform makes the entire process transparent and easy, aiding in easy liquidation.
Extent of Regulation
The Securities and Exchange Board of India(SEBI) regulates listed bonds. Since there is no dedicated regulated entity for unlisted bonds, investors generally have less confidence in them.
How to Invest in Listed and Unlisted Bonds?
There are many Non-Banking Financial Companies(NBFCs) that make trading in bonds possible, mainly listed bonds. NBFCs offer a range of financial services, from personal loan and insurance to investing in the equity and bond markets. An NBFC is the best place to buy bonds in India. One can invest using their dedicated apps. For unlisted bonds, investments can be made through brokers, directly from the issuers, or through aggregated bond providers.
How to Make an Investment Decision?
The decision to make an investment by buying a bond depends on many factors. The first one is to check the credit score as it influences the bond price and the risk profile of both the listed and the unlisted bonds. The second is to identify the investment needs. Bonds become the best investment option if one wishes to diversify their investment portfolio and does not have a good risk appetite. The third is to understand the yield to maturity of their bonds. The fourth is to evaluate the tax implications of the respective bonds.
Once these factors are addressed and deeply researched, a final investment decision can be made.