Investors need to monitor their bond holdings closely in times like these. “A sharp fall in prices or a spike in yields can be a sign of trouble. If a company whose bonds you own does a primary issuance at a very high rate of interest, that is another red flag,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor. Yields of bonds that trade can be obtained from the exchanges. Off-exchange transactions have to reported to the Clearing Corporation of India. The weighted average yield for the day’s transactions can be obtained at its website (ftrac.co.in). A downgrade by a rating agency is yet another warning sign.
Look closely at the bonds rated below AA+ in your portfolio. “Factor in the rating but also look at the company. I would worry less about AA-rated bonds from a bank and more about such bonds from an NBFC. I would also worry less about, say, bonds of Bharti Airtel having this rating than if they belong to a lesser-known company,” says Raghaw.
Government-backed bonds are the safest. “If you have invested in a PSU bond, or in a bond from a top-rung corporate whose papers are liquid, you should be safe,” says Rajesh Cheruvu, chief investment officer, Validus Wealth.
As for debt funds, stick to the safest of categories. “If you are investing for more than three years, go with a banking and PSU fund or the Bharat Bond Exchange Traded Fund. If you are allocating for less than three years, stick to an overnight fund for the next two months,” says Cheruvu.
Risk could be lurking in the debt portion of equity-oriented hybrid funds as well. Fund houses are carrying out inter-scheme transfers of bonds from credit-risk funds to hybrid funds, which could raise risk in the latter. “Structured obligations are present in the portfolios of hybrid funds. They have very little liquidity,” adds Cheruvu.
If you hold bonds, directly or indirectly, that make you uncomfortable, exit now. You can exit a corporate FD or a debt fund anytime. While you can sell NCDs on the exchanges, you may not get a good price there. Some NCDs and other bonds also trade in the over-the-counter (OTC) market and debt market brokers may be able to help you sell them there. Finally, be on the lookout for offers by issuers to buy their bonds back.