Don’t ignore these 5 factors ?

The Equicom
Need for diversification or high growth makes savvy investors dabble in illiquid securities. Some want to transact in tax free bonds, fixed maturity plans (FMP), closed-ended funds (CEF) or even non-convertible debentures (NCD) listed on stock exchanges. However, this is way different from buying a stock with fair volumes on the stock exchanges. Here are a few factors you should keep in mind:

Choose the right security

This may sound really obvious. But it is a task in some cases. For instance, it is easy to buy shares of Shriram Transport Finance, but if you are keen to buy a listed NCD of Shriram Transport Finance then there are 13 options. The number of listed NCDs issued by Srei Infrastructure Finance stands at 34.

Get the price and order right

“Never try to trade an illiquid security purely based on its last traded price. Instead arrive at a fair price at which the security should trade before placing your order,” Abhishake Mathur, Head-Investment Advisory Services at ICICI Securities, said. Bonds and FMP have accrued interest component in their price.

Size your trade

Getting the trade size right is essential for two reasons. First, how much of your portfolio is in investment opportunities. Allocate money as per your risk profile.

Exit Strategy

“Before entering a trade, you should be clear about your exit strategy. Given there is low liquidity and higher spreads, there would be a cost attached while you sell. However that may not apply if you are prepared to hold it till maturity,”.

Transaction costs and taxes

This could be a hidden shock for a novice. Understand the taxation associated with payoffs offered by the security. Taxes pertaining to the capital gains must be accounted for before entering into a trade. Transactions costs such as brokerage must be taken into account.

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