Some investments come with a maturity date. If you have the patience to hold the investments till they mature, then you can reap certain unsaid benefits off your investments. Some savvy investors use this technique. Let’s see how:
For bonds, the secondary market is not liquid, at least for the retail investor. The secondary market comprises of large institutions which trade in wholesale lots. If you buy a bond in primary issue and need liquidity before maturity, it is possible to sell it in the secondary market. But it may come at a cost of higher yield to the buyer. If you can hold a bond till maturity and there is a desperate seller in the market you can take the advantage by buying it at a relatively cheaper price, i.e higher yield than the prevailing market condition.
One can buy bonds in a primary issue in case you don’t have a trading account with a broker. If you don’t have a trading account, then you cannot participate in a security listed in the exchange. You can take benefits of higher yields in the secondary market. In order to know which yields are attractive, track the websites of NSE or BSE for bonds with a decent credit rating and maturity commensurate with your investment horizon. Whether the yields are moving up or down, you can track government securities of comparable maturities on the clearing corp of India website.
Unlike equity shares, preference shares generally come with an expiration date. They are like bonds because of a defined redemption date, defined dividend and the credit rating. Secondary market liquidity for preference shares is poor. One can reap the benefit by buying at relatively higher yields in the secondary market. There is an added advantage of tax efficiency in preference shares. The dividends are tax-free in your hands. If the dividends equity and preference shares exceed Rs 10 lakh, then you will have to pay tax at 10 per cent on dividends on the incremental amount.
Equity investment instruments do not have any maturity period. However, there are equity-linked debentures (ELDs). These are essentially bonds but the return on the bond is not like a coupon or interest in regular bonds. The return is linked to movements in the equity market. There are multiple possible terms in ELDs, which define your returns as per the market movement. If you are bullish on the equity market or a particular set of stocks but don’t want to risk your principal, you may take advantage of ELDs. The secondary market for ELDs is not liquid. One has to hold the investment till the maturity. However, the drawback of the product is that it is an HNI product and is not available for the masses.
Closed-ended mutual fund schemes with fixed maturity plans are listed at the exchange. They mature at the maturity date of the scheme and offer no liquidity in the form of redemption with the asset management company. If you want to redeem it before the maturity, then you will have to offer a steep discount on the price to the buyer. You can take the advantage by purchasing FMPs in the secondary market, provided you have an account with a broker.