 "Dollar-denominated bonds are attractive")
Dollar-denominated bonds of Indian companies are finding favour with non-resident Indians (NRIs) thanks to higher returns from these instruments. Indian investors who want to invest in these instruments can use the liberalised remittance limit of $250,000 per individual.
While yields of these bonds have declined in the past two years, these bonds can still be a good option for NRIs. “Yields have declined because of higher demand for these bonds and the rise in forward premia,” says Nitin Jain, president and CEO, Global Asset and Wealth Management, Edelweiss.
Bonds give returns between 2.5 per cent and four per cent. At present, the forward premia is at six to 6.5 per cent, say experts. Considering a leverage cost of one to 1.5 per cent and a loan to value of 70-75 per cent, investors can hope to make seven or eight per cent returns. “If they keep dollars in any other instrument abroad, they are likely to get one or two per cent returns,” says Jain.
“Invest in short-term bonds with a duration of not more than two years, so that you do not take a bigger hit on your portfolio if the interest rates move,” says Jain. On the other hand, if interest rates in the US go up, borrowing costs will rise, resulting in a reduced spread for the investor.
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Resident Indians investing in these bonds through the liberalised remittance scheme (LRS) route, which allows $250,000 per person, should remember that the route does not provide the option to use leverage.
“There could be a problem if a margin call is triggered as you will not be able to remit more money beyond the permissible LRS limit,” says A V Srikanth, founder, Citadelle Asset Advisors.
To counter this, some banks have created offshore structures to enable Indian investors to invest in such instruments without the leverage option. “Such structures ensure that in the event of a margin call, the customer's liability is restricted to the amount that s/he has invested,” says Srikanth.
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He adds that while this instruments works well for Indian investors in a depreciating scenario, it would be unwise to invest unless you are expecting the rupee to fall in the next few years.
As far as taxation goes, capital gains will be added to your income to be taxed in line with your individual slab rate. If these investors had invested in bonds issued in India, the gains are taxed at a lower 20 per cent with indexation for investments of over three years. “Investors have the option to get taxed on accrual or cash basis. It is advisable to use the accrual option in order to match the TDS (tax deducted at source) credit available, as per the income tax records,” says Rakesh Nangia, partner, Nangia & Co.
While yields of these bonds have declined in the past two years, these bonds can still be a good option for NRIs. “Yields have declined because of higher demand for these bonds and the rise in forward premia,” says Nitin Jain, president and CEO, Global Asset and Wealth Management, Edelweiss.
Bonds give returns between 2.5 per cent and four per cent. At present, the forward premia is at six to 6.5 per cent, say experts. Considering a leverage cost of one to 1.5 per cent and a loan to value of 70-75 per cent, investors can hope to make seven or eight per cent returns. “If they keep dollars in any other instrument abroad, they are likely to get one or two per cent returns,” says Jain.
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While the returns are higher, investors need to keep a few things in mind before investing. If the interest rates in India go up, then there could be mark-to-market margin calls. In this case, the investor will have to bring in more capital. On failing to bring additional margin, his position will be liquidated and he will have to incur losses.
“Invest in short-term bonds with a duration of not more than two years, so that you do not take a bigger hit on your portfolio if the interest rates move,” says Jain. On the other hand, if interest rates in the US go up, borrowing costs will rise, resulting in a reduced spread for the investor.
ALSO READ: Rise in bond yields, bad loans hurt govt banks
Resident Indians investing in these bonds through the liberalised remittance scheme (LRS) route, which allows $250,000 per person, should remember that the route does not provide the option to use leverage.
“There could be a problem if a margin call is triggered as you will not be able to remit more money beyond the permissible LRS limit,” says A V Srikanth, founder, Citadelle Asset Advisors.
To counter this, some banks have created offshore structures to enable Indian investors to invest in such instruments without the leverage option. “Such structures ensure that in the event of a margin call, the customer's liability is restricted to the amount that s/he has invested,” says Srikanth.
ALSO READ: Govt may issue Rs 15k cr sovereign gold bonds in H2 FY16
He adds that while this instruments works well for Indian investors in a depreciating scenario, it would be unwise to invest unless you are expecting the rupee to fall in the next few years.
As far as taxation goes, capital gains will be added to your income to be taxed in line with your individual slab rate. If these investors had invested in bonds issued in India, the gains are taxed at a lower 20 per cent with indexation for investments of over three years. “Investors have the option to get taxed on accrual or cash basis. It is advisable to use the accrual option in order to match the TDS (tax deducted at source) credit available, as per the income tax records,” says Rakesh Nangia, partner, Nangia & Co.