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

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...

ICICI Prudential Dynamic Plan Invest Online

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   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Commercial Paper (CP)

Invest Mutual Funds Online Download Mutual Fund Application Forms Commercial Paper (CP): These are issued by corporate entities in denominations of Rs.2.5mn and usually have a maturity of 90 days. CPs can also be issued for maturity periods of 180 and one year but the most active market is for 90 day CPs.   Two key regulations govern the issuance of CPs-firstly, CPs have to be compulsorily rated by a recognized credit rating agency and only those companies can issue CPs which have a short term rating of at least P1. Secondly, funds raised through CPs do not represent fresh borrowings for the corporate issuer but merely substitute a part of the banking limits available to it. Hence, a company issues CPs almost always to save on interest costs ie it will issue CPs only when the environment is such that CP issuance will be at rates lower than the rate at which it borrows money from its banking consortium. ----------------------...

Why credit history is critical?

Will you need a loan to buy a car or a house? Do you know why some people get their loans sanctioned quickly without any hassle, whereas others find that their approval is delayed or their application is rejected? If you want a loan, you will need to work to build a solid credit history because this can have a bearing on the ease with which you get loans. Read on to learn more about what is a credit history and how to build a good credit score. What is a credit history? Your credit history is a way of tracking your credit behaviour and habits — basically it shows how disciplined and regular you are when it comes to repaying your dues on loans that you have taken. It will show a complete record of your past borrowing and repayment record including details about any late payments or if you have defaulted on a loan. This track record is readily accessible to lenders and is used by them to when reviewing your loan application. Borrowers who have historically had a bad record of managing...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...
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