An attractive bet for a small portion of debt portfolio
The investment scenario doesn’t look very encouraging. Stock markets have not been performing well. Though interest rates are still high, there aren’t too many products to choose from on the fixed income side.
But you’ll have one now. Shriram Transport Finance Co Ltd is coming out with a Rs 300-crore non-convertible debenture (NCD) issue tomorrow, the first public offering this financial year. The issue closes on August 10. The company has reserved 80 per cent or Rs 240 crore for individual investors.
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For a minimum investment of Rs 10,000 (or 10 NCDs), the issue will offer coupon rates of 11.15 per cent for three years and 11.40 per cent for five years. Investors can opt for either annual payment of the interest or the principal (cumulative) at the end of the tenure. Under the cumulative interest option, retail investors will get Rs 1,716.15 after five years and Rs 1,373.19 after three years for every Rs 1,000 invested.
|Face value (Rs)||1,000||1,000||1,000||1,000|
|Interest rate (%)*||11.15||11.40||-||-|
|Series III and IV offer cumulative options *Rates given are for individual investors|
The catch: To attract more number of individuals, the company will offer an extra 90 basis points annually, which will push the rates to 11.15 per cent and 11.40 per cent. This means if you buy from the secondary market, you will earn 10.25 per cent or 10.50 per cent.
Comparatively, the country’s largest lender, State Bank of India, is offering 9.50 per cent for deposits maturing in less than three years and five years. The largest private sector bank ICICI Bank is offering 9.25 per cent for deposits maturing in two years to less than five years, while HDFC Bank, another private lender, is also paying 9.25 per cent interest for up to three and five-year deposits.
Short-term and ultra short-term debt funds have delivered over seven per cent in the last three years. In the past five years, these funds have given 8.5 and 7.5 per cent, respectively. Income and liquid funds gave over seven per cent in five years and around 6.5 per cent in three years, according to the mutual fund rating agency, Value Research (as on July 24, 2012).
Even company-fixed deposits, currently, will earn you slightly less than NCDs. For instance, Mahindra Finance is paying 10.25 per cent for three years, Dewan Housing Finance Corp 10.50 per cent, Mahindra and Mahindra 9.75 per cent and Godrej Industries 9.25 per cent. (Source: Bluechip India)
More companies like Shriram City Union Finance and L&T Finance may also come up with similar offerings. So, should an investor wait for the coming issues or buy Shriram Transport Finance offer?
Given the overall gloomy economic climate, this NCD issue can be a good instrument to park your money, says Mukesh Dedhia of Ghalla Bhansali Stock Brokers. “The credit rating allotted to this issue is good. Shriram Transport Finance is a known company and importantly, you will get to earn more than 15 per cent extra after tax (for the highest tax bracket) compared to fixed deposits," he explains.
The interest earned on debt instruments is added to your total income and taxed as per slab. Therefore, in the 30 per cent tax bracket, your net interest income from this NCD will be 7.98 per cent and from SBI’s deposit, 6.65 per cent. In comparison, capital gains of debt funds will be taxed at 10 per cent and 20 per cent with and without indexation.
Says certified financial planner Pankaj Mathpal: “This issue can form 8-10 per cent of your debt portfolio. Do not wait for future issuances as you may not get these rates three-four months down the line."
But be aware of the risks as well. NCDs are safer than corporate bonds but less safe than bank deposits. With NCDs, you take a bet on one company and the risk of default is always there.
Liquidity is another issue. In a rising interest rate regime, getting out of a bank deposit may be easier than liquidating an NCD. NCDs are listed on stock exchanges and may have to be sold at a discount if urgent in case there aren’t many trades happening on that counter.