Skip to main content

High Yield NCDs - Good or Bad

 


While NCDs have an advantage over corporate FDs, investors should tread with caution.
 
With no upcoming tax-free bond issues, fixed income investors face a dearth of investment opportunities.
 

While one can buy listed high-yield tax free bonds in the secondary market, they come at a premium. In this situation, high yield seekers veer towards corporate fixed deposits or non-convertible debentures (NCD). NCDs are more in demand as they offer higher yields than corporate FDs. Edelweiss Housing Finance's recent NCD was fully subscribed on Day One. Three others--Dewan Housing Finance, Srei Infra Finance and India Infoline--are slated to hit the market soon. So should investors consider them for their fixed income portfolios?


NCDs offer around 100-200 bps more than bank FD rates, and around 100 bps or 1% more than corporate FDs. Edelweiss Housing Finance's `500 crore NCD issue carried an interest rate of 9.57% per annum in the monthly interest payment option or 10% per annum for an annual interest option over a tenure of 120 months. The 36-month and 60-month tenure NCD offered 9.5% and 9.75% respectively. To put this in context, SBI currently offers 7% interest on its FDs of tenure more than three years. The yield on 10year government bonds is at 7.31%.

Upcoming NCD offers are expected to carry similar coupon rates. Even after considering post-tax return, a 9.5% debenture yields around 7.6% and 8.55% for those in the 20% and 10% tax bracket respectively. Unlike corporate FDs, NCDs can be bought in dematerialized form and are freely tradeable, making them more liquid. However, liquidity on the exchange can be poor at times, preventing the investor from exiting the instrument at the right price or time. Even though yields are tempting, it may be difficult to buy at current prices, particularly if you are looking to build a sizeable portfolio. Besides, when these bonds are bought in demat form, there is no TDS. This saves individuals the trouble of filing forms 15GH to claim exemption. But in case of NCD in physical form, TDS is applicable if the annual interest payout is more than `5,000.

Another benefit NCDs offers over corporate FDs is the chance of fetching capital appreciation on principal, if interest rates soften during the tenure of the instrument. This is because bond prices and interest rates move in opposite directions, offering you a chance to sell them at a profit, instead of holding on till maturity. "In an environment where interest rates are headed lower, it makes sense to opt for bonds instead of FDs. However, do not expect high capital appreciation in corporate bonds as they typically have lower tenures than government bonds. Longer tenure instruments are more sensitive to interest rate changes. For taxation, NCDs are eligible for long-term capital gains after a year. Gains realised after a year from purchase is taxed at 10% (without indexation). Interest earned on these NCDs is added to the individual's income and taxed as per the applicable slab.

Credit profile matters

Experts caution against blindly following higher yield. Higher yields are on account of the higher risk premium. Before investing in NCDs, check out the company's financial health and credit profile. Avoid betting outside wellestablished names. Check the credit rating of the issuer. It is advisable not to buy any NCD with credit rating lower than AA. Lower rating comes with higher coupon rate, but also a higher default risk. Investors should ideally assess a company based on its business profile. Consider the reputation of the issuer group before investing.

Buying listed bonds

If you want even higher coupon, you may consider any of the existing NCDs on the ex change. Several are offering attractive yields.However, avoid investing in instruments maturing in the next few years. As interest rates are expected to bottom out in coming months, opting for an NCD maturing in the next 12-18 months will expose you to reinvestment risk.

Also, the short residual maturity means these will not see much capital gains owing to reduction in interest rates in the interim.

 



-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saver Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

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

Popular posts from this blog

Axis Mutual Fund NFO - Axis Fixed Term Plan Series 18

Axis MF has announced that the NFO period of Axis Fixed Term Plan Series 18 (15 Months) under Axis Fixed Term Plan Series 17 19 has been preponded from February 27 to February 24.        --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) HDFC TaxSaver ICICI Prudential Tax Plan DSP BlackRock Tax Saver Fund Birla Sun Life Tax Relief '96 Reliance Tax Saver (ELSS) Fund IDFC Tax Advantage (ELSS) Fund SBI Magnum Tax Gain Schem...

Budget 2014 Highlights for Saving

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   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

Franklin India Taxshield

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   This fund maintains a quality portfolio of large-cap orientation. The fund manager adheres to a bottom-up investment approach and looks for companies whose current market price does not reflect future growth prospects. Investments are in companies that can drive future earnings growth. Stocks are selected based on the company's financial strength, management's expertise, growth potential within the industry, and the industry's growth potential.   The portfolio is well-diversified across sectors and market capitalisation and follows a blend of value and growth style of investing. The fund follows a predominantly large-cap allocation of over 70 per cent, with small-cap allocation never exceeding 10 per cent since inception.   Performance The fund doesn't dev...

ELSS Funds for different Risk Profile

Match your Goals Risk Profile With ELSS Investment   DIFFERENT TRACKS Unlike funds with a clearly defined investment universe -- large-cap, mid-cap or multi-cap - Tax Saving Schemes do not specify investment focus If you are looking for an equity Linked Savings Scheme (ELSS) to pare your tax burden, the plethora of options may confuse you. Many investors simply opt for ELSS funds , also called tax saving schemes with the best return over a certain time period. However, this may not yield the best results. There are several types of ELSS funds and it requires a nuanced approach to pick the right one. DIFFERENT RISK PROFILES Unlike funds with a clearly defined investment universe -- large-cap, midcap or even multi-cap schemes in the ELSS category do not specify their investment focus. While these schemes have the flexibility to invest anywhere, most tend to follow a defined template. For instance, some funds take a distinct large-cap tilt with a limited exposure to mid or small-cap st...

Reliance Tax Saver Fund Online

Invest in Reliance Tax Saver Fund Online   ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saving Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) Fund 9. Religare Tax Plan 10. Birla Sun Life Tax Plan Invest in Best Performing 2016 Tax Saver Mutual Funds Online Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a mis...
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