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Given the volatile equity markets, investors are taking comfort in debt instruments. While bank Fixed Deposits are the safest bet, the returns are not able to beat inflation. But should high yields be at the cost of credit quality? The recent rout in the debt market has shown that even in case of debt instruments there can be loss of capital.
In such a scenario, are secured non-convertible debentures (NCDs) a good option? Or should one look at tax-free bonds? What about tax-saving bank FDs?
After Srei Infrastructure Finance and Muthoot Finance, the latest non-banking finance company to come out with secured NCDs is India Infoline Finance Limited.
IIFL’s NCD issue is opening on September 17. The interest rate offered on the monthly option is 12.68% and in case of the annual interest option it is 12%. But the post-tax returns for someone in the 30% tax bracket is about 8-8.5%. IIFL’s NCD has a credit rating of ‘AA’. So, if you similar yields from another instrument that has better credit ratings, you should consider that.
Ashish Shanker, head–investment advisory, Motilal Oswal Private Wealth Management says that given the deteriorating credit environment, investors themselves are conservative and are aware of the risks of investing in such instruments. That is why lot of money is going to Fixed Maturity Plans (FMPs).
"In this market if you want to invest in debt, it does not make sense to take risk. We prefer companies which have a more diversified book. So, we are advising investors to look at bond issues of highly rated public sector companies which will hit the market soon,'' Shanker says.
IIFL's NCD may be a good option for those in the lower tax bracket, but for those in the higher tax bracket the tax-free bonds issues work out better, says Raghavendra Nath, Raghvendra Nath, Managing Director – Ladderup Wealth Management Private Limited.
For those in the highest tax-bracket the returns from REC's recently launched tax-free bonds, works out to over 12%. The issue which is closing on September 23, is better in terms of risk profile, since it is rated at "AAA" and has sovereign backing.
Since IIFL is an NBFC and is in the lending business, the overall risk is higher, as compared to, say a manufacturing company. Therefore, investors should be aware that there will always be credit risk associated with such NCDs, says Feroze Aziz, Director and Head, Investment Products, Anand Rathi Private Wealth Management.
Of the other two recent NCD issues, Srei is offering 11.75% and has a rating of 'AA' by one rating agency and 'AA-' by another. Muthoot is offering 12.55% and has a rating of 'AA-".
In case of Srei the credit quality is better due to the diversified loan book. But in case of Muthoot the risk is higher because its loan book comprises largely of gold loans and gold prices have been extremely volatile.
Since more PSUs will be launching tax-free bonds, it is better to wait than rush to invest in NCDs, right now. Besides, given the tight liquidity conditions, there are chances that interest rates could go up. If that is the case, waiting for some time could even fetch you better yields. And in case interest rates go up, the price of NCDs will go down, which means a loss of capital on your investment. But that will not be an issue if you remain invested till maturity.
One advantage of NCDs is that they are shorter duration, up to five years, as compared to tax-free bonds which are of longer horizon of 10-20 years. But you can consider tax-saving five-year bank FDs, which are currently offering 8.75-9%. One-year FMPs are also offering at 9-10%. For risk-averse investors, these are better options than NCDs.
