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

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in 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]
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