Invest small portions in NCDs and company deposits

With the increasing interest rates, returns from non-convertible debentures (NCDs) and corporate fixed deposits are on the rise. In fact, some of these are higher than bank fixed deposits.

Industry players say Shriram Transport Finance, Shriram City Union Finance, Manappuram General Finance and Muthoot Fincorp plan to launch NCDs in the coming months. Usually, the investment tenure for these instruments is three-five years. The rates are impressive as well. For instance, well-rated companies are offering 12-13 per cent. The not-so-well known ones are offering even higher rates to garner funds.

Similarly, company fixed deposits are offering 10-11 per cent for up to three years. Dewan Housing, LIC Housing, United Spirits, J K Paper, Gabriel India, JP Associates, Unitech, Mahindra & Mahindra are a few firms raising working capital through this instrument.
 

NCDS DECODED

• Non-convertible debentures are long-term debt instruments
• These do not give investors any voting rights, like in the case of equities
• Rate of interest (12-14%) is higher than bank deposits
• Tenure is three-five years
• Riskier than bank deposits

If you are a debt investor, these products are offering 1-2 per cent more than most bank fixed deposits. While State Bank of India (SBI) is giving 8.25 per cent on three-five year deposits, ICICI Bank is offering 8.75 per cent. Bank fixed deposits of five years and more are exempted from tax.

At the same time, returns from debt funds stand at 6.16 per cent for the three-year period ended May 30, according to data from mutual fund rating agency Value Research.

However, both NCDs and corporate FDs are risky. Though the former is slightly safer than the latter, bank fixed deposits are the safest. In both cases, you bet on a company and the risk of default remains, say financial planners. Deposits are unsecured and in case of a default, you will find it difficult to recover your money.

Talking of returns, banks like Lakshmi Vilas are offering over 10 per cent on fixed deposits.

In case of corporate deposits, liquidity can also be an issue. Most companies don’t allow you to break the deposit for a certain period (up to six months). If you do, you are penalised with a lower rate of interest (one-two per cent less). Company deposits typically target conventional savers, retirees and pensioners.

Another important thing is to check the fundamentals and credit ratings of the company before investing. Very few highly rated companies offer lucrative rates. Only the low rated or debt-ridden ones give over 12 per cent. While United Spirits is offering 11 per cent for a year and 11.5 per cent for two years, Mahindra & Mahindra is paying eight and seven per cent for three and one year, respectively.

Experts advise being selective about the company you are investing in. Ideally, invest in large cap companies, even if the returns get capped slightly. Therefore, financial planners suggest investing in tranches or splitting the investible amount in smaller parts. Say, you have Rs 50,000. Divide it into three-five parts and then invest in such high-risk instruments.

Remember, the overall earnings after tax will get reduced. Those in the 30 per cent tax bracket will earn a total interest of 8.5 per cent (on 13 per cent returns). In comparison, capital gains of debt funds will be taxed at 10 per cent and 20 per cent with and without indexation, respectively. For better returns than bank fixed deposits, financial experts suggest fixed maturity plans over company deposits. These are tax-efficient, too.