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Investors looking for diversification in their debt portfolio can consider corporate bonds offered for the next five-odd years by highly rated companies, as interest rates are likely to trend downwards.
Shriram Transport Finance’s secured redeemable non-convertible debenture (NCD) issue will open on Wednesday and close on July 22. Last month, Edelweiss Financial Services’ subsidiary, ECL Finance, came out with an unsecured NCD issue, for a period of 70 months at a coupon rate of 12 per cent. In March, non-banking finance company India Infoline Finance had come out with a six-year NCD offering 12.68 per cent. Shriram is offering 11, 11.25 and 11.5 per cent on its NCDs for three, five and seven years, respectively. Senior citizens will get an additional 0.25 per cent across all tenures. In comparison, banks are offering 9-9.5 per cent on deposits of over one year.
According to Raghvendra Nath, managing director, Ladderup Wealth Management, for investors with a large debt portfolio, NCDs can offer diversification, along with bank fixed deposits (FDs). Though coupon rates on the NCDs are higher than the interest rate offered by bank FDs, the former are not as liquid. “One should buy these with an expectation to hold to maturity,’’ he says.
Beside, since investors will be taking a risk on a single company for a prolonged period, the rating of the company is important. “Investors should always look at the probability of repayment in such issues. So, for senior citizens, bank FDs might be a better option, since they get 0.25 per cent more than card rates and FDs are more liquid,’’ Nath adds.
Shriram Transport has been in the business of asset-backed financing for a long while and is rated highly. Srikanth Meenakshi, co-founder and chief operatiosn officer at FundsIndia.com, says for a three-year period, the NCDs are a very good option from both the security and returns point of view. “The company is in a good place in terms of the country’s economic and its own balance sheet growth. The customer service is good, in case investors wish to redeem the NCDs before maturity,’’ he adds.
For an investor who can take a slight risk, these NCDs are a good way to increase the yield, says certified financial planner, Arnav Pandya. “They will offer inflation-beating real returns. So, for a good company, it is advisable to lock into these rates because interest rates will fall,’’ he says.
From the taxation angle, NCDs will be more beneficial for those in the lower tax brackets, of 10 or 20 per cent tax. For instance, for a three-year period, at a coupon rate of 11 per cent, the post-tax return will work out to 9.9 per cent for those in the 10 per cent bracket, 8.8 per cent for those in the 20 per cent bracket and 7.7 per cent for those in the 30 per cent tax bracket. Considering a nine per cent FD offers 6.3 per cent post-tax returns for those in the 30 per cent tax bracket, the NCDs offer higher returns.
Nath says for investors in the highest tax bracket, debt mutual funds make more sense because of the long-term capital gains tax, which gives the benefit of indexation. However, Pandya notes, there is always uncertainty with MFs because one does not know when interest rates will fall. In NCDs, since you are locking into the rates for the whole tenure, that uncertainty is taken care of.
“On a net basis the returns will be at par. Both debt MFs and NCDs have their place in the debt portfolio. It should not be one instead of the other,’’ he adds.
