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

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Good time to invest in Infrastructure 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   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...

Stocks with a high dividend yield

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India) Stocks with a high-dividend yield can provide investors additional cash flow. More importantly, it is tax-free   With April 2011 just over, the 'earnings season' is well and truly here. This is the time most companies pay out a portion of their profits as dividends to shareholders. Since dividends are tax-free, they are an attractive income source with a select class of investors, who depend on these for additional cash flow. SIGNIFICANCE A company doing well and generating profits will usually be in a position to declare dividends regularly. Hence, a key parameter one should look at whilst investing in a stock is whether the company has a good dividend record. Typically, dividend yield stocks are large-caps and generally not capital-intensive. This is suggestive of the fact that the downside risk on...

Systematic withdrawal plan

  Start Systematic withdrawal plan Online Although an SWP gives you regular income and saves on taxes in the long term, you cannot open an SWP on a scheme where you have an ongoing SIP   iStockPhoto If you are planning to take a sabbatical from work or are retiring soon, you may be looking at different investment options that give a regular income. Usually, a lump sum is invested to get regular fixed amounts later. Popular products include post office monthly income scheme, Senior Citizens' Savings Scheme and monthly income plans (MIPs). A lesser known option is the systematic withdrawal plan (SWP) in mutual funds. Recently, some funds have even removed the exit load on SWPs if you were to withdraw up to 15-20% in the first year, to encourage people who want to start investing in this instrument. Here is a look at what an SWP is. WHAT IS SWP? Many of us would be familiar with a systematic investment plan (SIP ), where a corpus ...

UTI Equity Fund Invest Online

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   UTI Equity Fund   Invest Online UTI Equity is a large cap-oriented fund with assets under management worth Rs. 2,269 crore (as on June 30, 2013). The fund was originally launched in May 1992 as UTI Mastergain and is benchmarked against S&P BSE 100. A couple of years back the name of the fund was changed to UTI Equity Fund and many of the smaller funds of UTI were merged into this fund. Performance The fund has outperformed its benchmark as well as the equity diversified category average in the last one-, three- and five-year periods. It has repeated the same in 2013 (as on May 31). Since its inception the fund has delivered an impressive 26 per cent compounded annual growth rate which is superior to its benchmark performance in the same period. Y...
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