Opportunity in GOI 10yrs BONDs

Stock Opportunities
1

Hi guys,
I just wanted to share this opportunity in GOI 10yrs BOND with you.

I feel that the top main reason for any of you to invest in GOI BONDs should be as follows.

  1. If you want to get better rate than FD and not take risk this is the right opportunity for you.( I will explain you what do I mean by not taking RISK later in this topic)

  2. According to me this investment of yours is going to be for 2 or max 3 yrs so if you are new to markets and you don’t want to right away invest you money but still want decent returns while you are understanding markets then you can go for it.

  3. If you plan to invest your entire funds in stock market and take it up as your career than I fell you will need a regular source of income. So instead of investing in dividend giving companies you can put your money here.

I feel the above given reasons are the top main reason for you to invest in GOI bonds.

According to me the risk of loosing your initial capital here is very low. You will only loose your initial capital here if government defaults to pay back the bond amount which is going to happen if India goes into WAR or we have a deep financial crisis like SRILANKA. .

I would like to share some terminologies and working of BOND market.

  1. Bonds are always seen with the base of 100.
    eg: government issues 5000 Rs bonds. So you compare all the values with 100 and then multiply it by 50 to reach 5000.

  2. Coupon rate is the rate at which government issues the bonds.
    eg: government issues these 5000 Rs bonds with the interest rate of 6.8% per annum.

  3. Since the bonds are also traded in secondary market the price of bonds keeps going up and down. Now suppose the bonds are trading at 95 Rs( remember the base is always 100 you can multiply it with 50) and you buy it. You are going to receive the same interest 6.8% which is 6.8 Rs but since you purchase the bond at 95 for you the interest is 7.5% This is known as yield.
    Yield is the rate of interest you will receive on you invested capital.

  4. Maturity is when the period of bond ends and you get your principle capital.

  5. Now on maturity let say after 5yrs you get your 100rs back. what is you simple interest for these 5 yrs. It is not 7.15% it going to be 8.15% . Why because you purchased the bond at 95 but government had raised 100 so they will return you 100 regardless of the price in secondary market. This is known as yield to maturity.

Currently a 10 year government bond is trading at a yield of 7.3%. The par value is 100 Rs with a coupon rate of 6.8% and the value of the bond in secondary market 94.5rs so the yield comes out to be 7.3%

The bond prices are low because of high inflation resulting to high yield. Now the yield are going to come done ( also means bond price are going to go up ) as the inflation starts stabilizing. I feel after the June rate hike slowly the inflation will start going down or stabilize it might even take more time. But over the next 2yrs inflation has to go down unless there is another war or some uncertain event which has a global impact.
So if you buy the bond at 94.5rs this price is bound to go back 100 in next 2yrs or it can even be faster.

So if you take your interest of 6.8*2 Rs for 2 yrs and then sell the bond at 100 making a capital gain of 5.5rs you end up making 19.1rs on 94.5rs which comes out to be 20% in 2yrs with extremally low risk because it is government bond.

Now what if china attacks on Taiwan, we never know. The inflation will further go up and the bond prices will further go down lets say it goes to 90rs. In this situation one of the major drawback is that you will have to wait till maturity and your money get blocked and you return also goes down to 7.5% to 8%.
Now I want you to calculate the probability of this situation and invest accordingly. But if you see the good side even in this situation you are getting 7.5% .

So people who are happy with 20% in next 2 yrs without much risk this is a good opportunity for you. Now it might not be exactly 20% but it is definitely going to be above 15%.

Let me tell you the cons of bonds.
1 If the interest rates goes down which I am hoping and the bond prices rise the markets are also going to go up. So you might feel bad for making less money here when markets could have rewarded you more. So if you are full time into markets then I would suggest you to not invest your money here but if you are not then this is a good opportunity for you.

2 If the bond prices go further down over a long period lets say 2yrs which I feel has very less chance your money gets block because you would not want to sell it at loss and will have to wait till maturity.

I would also like to give an advice here. If you are buying bonds try buying the bonds which give interest half yearly and not yearly.

Overall it is a good opportunity but I am not going to put money here because I feel I can make more money via equities but if you don’t want to risk your money and still want decent returns go for it.

THANKYOU

45 Likes
2

Thanks. Good writeup.

Can you talk about the operational aspects of how to buy/sell these bonds by retail investors? Long back I had looked at zerodha gsec but it seems only on specific days these bonds are issued ?? If you can give same example ticker names which we can buy from secondary market it will be helpful.

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Could you reply further below on where to purchase, how it is taxed and how the maturity refund will happen. I remember seeing RBI retail direct or some such site. Also how to interpret the bond quotes seen in the sites. Zerodha varsity has this info?

I realise that this is an additional imposition and ask from you and I’d understand if you dont plan to respond. Thanks

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  1. I belive that inflation and hence bank rates will keep going up atleast this calender year. As such I would delay the purchase. Although , The bank rate spike is filtered in the prices. I expect the yields to touch about 8% which in turn would price the bonds at below 90.
  2. There are many traders in bond markets but they like deals in millions. For retail , you may try the .likes of PNB Gilts . But the deals favour them and they are not great in priving the deals.
  3. The best way to invest would be in constant 10Year bond funds , sold by MF AMCs. You get ample liquidity to buy or sell as you need , of course , with applicable exit loads for short term investments. The other option would be to invest in short term G-sec funds offered by many MF AMCs.
  4. Its very difficult to manage risk in debt markets because actions by central banks depend on many variables where as equty is market and earnings driven and hence rather more predictable.
  5. Dynamic asset allocation funds ( balanced advantage funds) are good options. I prefer them over pure bond funds.

My 2 penny worth of opinion :slight_smile:

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Tax is like property , 3 years and above for LTCG

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great and very informative write up. Compliments

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Could you please expand on this? Where and who offers this? I just started buying SBI Magnum Gilt MF funds assuming in a high interest rate scenario, these funds should do well.

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Nktiwary thankyou for adding more information to it.
I think the taxation here is a bit different as you have shared.
The interest you receive on BONDS are taxed like FD ( fixed deposit ) and the capital gain which you make on BONDS are taxed like EQUITY markets. LTGS at 10% over a period of 1yrs and STCG at 15% for less than 1 year

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Hi BHASKARJAIN ,
Actually I have never purchased bonds so I don’t know the buying part of bons very well. But I feel the best way to buy bonds is through the Retail direct account . It is an initiative taken up by RBI which lets you to directly purchase bonds from secondary market without the involvement of INTERMIDATORIES .
The account opening process is online directly form RBI Retail Direct this website

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Sir taxation on capital gains on bonds is different to equity. STCG upto 3 years holding for unlisted bonds and 1 year for listed bonds at slab rate. After 3 years/1 year for unlisted bonds/listed bonds, its LTCG @ 10% flat or 20% with indexation. The interest is charged to tax at slab rate like FD, as you said.

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  • Bonds provide coupon payments and return principal amount on maturity. Firstly the coupon payments are the gains from bond investment; hence they are taxable. Secondly, you may sell bonds in the secondary market before maturity, or you may hold bonds till maturity. In either of the cases, if there is capital gain, then the gains are taxable.
  • The bonds listed on the National Stock Exchange are Listed Bonds, and bonds that are not listed on the National Stock Exchange are called Unlisted Bonds.
  • Short Term Capital Gain Tax is applicable if you sell listed bonds before 12 months(it is 36 months in the case of unlisted bonds).
  • Long Term Capital Gain Tax is applicable if you hold listed bonds for more than 12 months or hold unlisted bonds for more than 36 months. Refer to the table below.

I have taken this part form a website I hope this is how bonds are taxed

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Yes Sir. You are right. The holding period to qualify as LTCG is only 12 months for listed bonds. But the tax rates are as I mentioned in my post. I will edit it so no one gets confused.

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Dear Ishwar . Glad meeting you on terra firma. Tax is not like equity because there is no STT on debt funds. STCG is upto 3 years and LTCG beyond that.

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Data in this table: Get Annualised historical returns. If 1Y column is 10% that means, fund has given 10% returns in last 1 year.

NAV & Returns data as on: 13-May-22.

  • Direct Plans
  • Regular Plans

Search:

Scheme Name Crisil Rank AuM (Cr) 1W 1M 3M 6M YTD 1Y 2Y 3Y 5Y 10Y
DSP 10Y G-Sec Fund - Regular Plan - GrowthGilt Fund with 10 year constant duration - 57.08 1.06% -0.01% -2.51% -3.47% -3.59% -3.84% 0.44% 5.81% 5.24% -
ICICI Prudential Constant Maturity Gilt Fund - GrowthGilt Fund with 10 year constant duration - 305.62 1.05% -0.16% -2.25% -2.68% -2.71% -0.20% 2.84% 7.78% 7.63% -
IDFC G Sec Fund - Constant Maturity Plan - Regular Plan - GrowthGilt Fund with 10 year constant duration - 214.48 1.05% -0.07% -2.51% -3.06% -3.20% -1.08% 1.92% 7.26% 8.14% 9.10%
SBI Magnum Constant Maturity Fund - Regular Plan - GrowthGilt Fund with 10 year constant duration - 704.14 0.96% -0.06% -2.17% -2.73% -2.85% -0.22% 2.21% 6.82% 7.22% 8.75%

taken from Moneycontrol site

This is the truth

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They show the real picture. the yeilds are negative , thanks to central banks actions. you may study short term to medium term accrual funds , not duration funds for the time being. Just remember Buffet - protect your capital ; if you do not loose money , you will earn money.

17

Thank you for taking the time to put this out but I dont see the difference between this

SBI Magnum Gilt Fund - Direct Plan - Growth [54.0297] | SBI Mutual Fund - Moneycontrol

and

SBI Magnum Constant Maturity Fund - Direct Plan - Growth [51.1104] | SBI Mutual Fund - Moneycontrol

This may be straying off topic but the constant maturity idea eludes me

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18

Hi,
Based on my experience of investing in Dynamic Bond Funds, Mid Term G-Sec Funds, and Short Term Bond or Money Market Funds, I would be cautious while investing in 10 Year G-Sec bonds directly or via. Constant Maturity Funds.
I believe that, current bond yields do not look fully factoring in further rate hikes by Indian Central Bank (mostly), as even if inflation cools down, there could be smaller rate hikes in mid term/next 12 months. If one invests now, you should be prepared for negative returns in the short to medium term, as interest rate volatility in bond prices generally is much higher than rate hikes.
One may take partial exposure slowly, say 20% now and gradually increase it as there should be sufficieint time window available to increase it to 100%.

I may be completely wrong in my analysis, and bond yields may not go up at all.

Disc: I do not hold long term G-Sec Funds / Bonds and mainly invested in short term debt funds now but still finding it difficult to beat FD returns since 2020 onwards.

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19

Write GOI and the year of maturity, you will get the bond quote showing interest rate first followed by GOI followed by year of maturity.

Screenshot_20220516-220258
Screenshot_20220516-2202581080×2400 98.5 KB

I haven’t seen any trading in them till now.

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In SBI Gilt funds , the fund Manager can invest in bonds of any maturity ie Bonds maturing in 6 months, 2 years, 6 year, 10 years or 25 years ( just for example) as per mandate of the scheme. I have not gone into the scheme details . The maturity profile can be any period , as per scheme mandate. The risk and reward depend on the maturity period of the funds.
In constant duration, the fund manager will manage the funds in such a way that the maturity target remains the same , i.e. constant at 10 years.
This will be exposed to short term volatility but in the long term, the returns are more likely to reflect long term averages.