Skip to main content

L&T Finance NCDs vs Tax free PSU Bonds

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Mutual Fund Application Forms

Call 0 94 8300 8300 (India)

Real returns on tax-free bonds are higher as income from NCDs is taxable, but your money will be locked for 15 years


Debt investors always rued the fact that it is not easy to sell their non-convertible debentures on the exchanges. These debentures are hardly traded and many a time one has to offload them at a discount. However, L&T Finance is changing the game. L&T Finance will open a repurchase window every month where NCD holders can submit the repurchase application. The repurchase offer for July is currently open and investors can submit their applications till Tuesday (July 10). NCD holders already have the option to sell their holdings on the National Stock Exchange, where they are listed. As per the buyback option, each debenture holder can tender a maximum of up to 100 debentures for buyback per quarter. The maximum number of debentures bought back by the company per quarter across all series shall not exceed 500,000 on a first-come first-serve basis.


According to investment experts, if the L&T Finance's offer meets positive response from investors, other companies are likely to follow suit. Also, it will encourage investors to buy more NCDs, as their biggest grouse of illiquidity will be a thing of the past. As for investors in L&T Finance NCDs, investment experts believe that investors should assess the situation before rushing to encash the money. "Participating in this buyback offer is not mandatory. You can choose to stay invested in these NCDs or sell it on the stock exchange where it is listed. If you are in the high tax bracket, it may make sense to opt for the buyback option or sell these NCDs on the stock exchange and buy tax-free bonds of PSUs, such as NHAI or PFC, which will give you a higher yield.


To begin with, you have to find out whether tendering your NCDs in the buyback option or selling it on the stock exchange work better for you. Take the case of L&T Finance – N3 option. The debenture matures in January 2017 and pays a coupon of 9.95%, compounded annually.


The face value of the debenture is . 1,000 and it will be redeemed at . 2,025 at the end of the tenure. Right now the debenture is trading at . 1,288 on the NSE, while L&T Finance has offered to buy it back at . 1,286.26. This means you get a slightly better price at the exchange, but you also have to remember that these debentures are not traded frequently on the exchange and you may get a lower price if you were to sell a large number of them at one-go. Also, you will incur brokerage charges when you sell it on the stock market. However, in the case of L&T Finance – N4 option, which matures in September 2019 and carries a semi-annual coupon of 10.24%, the repurchase price is . 1,035.27, while the price at which it is traded on the market is . 1,069. In this case, it might make sense to give your NCDs through the stock market, provided you can take the risk of illiquidity in the market. L&T Finance N5 and N6 options mature on March 10, 2013, which is just eight months away.


The coupon payable is 8.4% in case of the semi–annual option and 8.5% in the annual option. Interest income on NCDs is taxable. So if you get an interest of 8.5% and are in the highest tax bracket, the effective yield comes out to 5.87% per annum. Now compare this with the NHAI tax-free bond, which has a 'AAA' rating, with a coupon of 8.3% per annum, for a tenure of 15 years and trades at . 1,085, thereby giving you a tax-free yield of 7.73% per annum. However, do keep in mind that these bonds have a tenure of 15 years, and do it only if you can remain invested for that time frame. Similarly, a 15-year PFC tax-free bond with 'AAA' rating and a coupon of 8.3% per annum is available at. 1,078, giving you a yield of 7.79% per annum.


So if your income falls in the highest tax bracket, selling the NCDs and switching to PSU bonds of NHAI or PFC is one option for you. At a time when interest rates are expected to fall, besides the higher return, you also move into a product with a longer tenure.

 
In case interest rates were to drop, a bond with a longer maturity could give you a higher capital appreciation.


However, this may not work for everyone. If you are not liable to pay tax on your income, it would be better to remain invested. For example, in the L&T Finance – N4 option, where the coupon is 10.24% per annum, it makes sense to be invested as comparable bank deposits could offer you a lower return of about 9-9.5%

Happy Investing!!

 

We can help. Call 0 94 8300 8300 (India)

 

Leave your comment with mail ID and we will answer them

                        OR

You can write back to us at prajnacapital [at] gmail [dot] com

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds        Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds     Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds    Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds             Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds              Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Gold Mutual Funds             Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

What are the factors affect the changes in Interest Rate of Fixed Deposits?

  What are the factors affect the changes in rate of Fixed Deposits? Fixed Deposits are now considered to be a very old fashioned method of saving, but still attract many investors since they have guaranteed returns at the end of the tenure of the investment at a decent interest rate. There are various factors that affect the rates of interest for a Fixed Deposit. Policies of the Reserve Bank of India   - The several norms and restrictions posed by the Reserve Bank of India , in order to gain optimum control over credit and inflow and outflow of fund throughout the country. The repo rate changes, cash reserve ration tends to change and these changes affect the banking products like Fixed Deposits, loans etc. Recession   - When unemployment in a country crosses the benchmark set Recession hits, and slowly the country faces an economic slow movement, affecting the purchasing power of the people in the country, forcing the Reserve Bank of India to release more funds in the financial marke...

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...

Capital Protection Oriented Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Capital Protection Oriented Funds   Erosion of capital is one of the key concerns for investors wanting to invest in equity mutual funds. To address this concern, asset management companies have launched Capital Protection Oriented Funds (CPOFs). What are CPOFs? CPOFs are generally three to five-year, closed-ended funds where 70-80% of the portfolio is invested in fixed income securities, which mature on or before the scheme's tenure. The investment in fixed income securities grows to 100% at the end of the tenure, providing the investor with capital protection. The remaining portion (20-30%) is used to take exposure to equity, which provides the upside. Exposure to equities is either by directly buying equity stocks (plain vanilla CPOFs) or by b...

About CRISIL IPO Grading

CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, or a comm...

SBI Small Cap Fund

SBI Small Cap Fund scheme seeks to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme by investing predominantly in a well diversified basket of equity stocks of small cap companies. SBI Small Cap Fund has widened its margin of outperformance relative to its category and benchmark in the last one year, earning itself a five-star rating. The fund shows a hefty 18 percentage-point outperformance relative to its peers in the last one year, 5 percentage points over three years and 4 percentage points over five years. Needless to say, it has also outpaced its benchmark to deliver convincing five-year annualised returns of 37 per cent. A believer in the credo that a small market cap does not reflect business quality, the fund looks for five attributes in the stocks it buys: competitive advantage, return on capital, growth, management and valuation. SBI Small Cap Fund is among the few in this space to remain at quite a man...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now