As cos offer different interest rates, diversify across NCDs to lower risk

Illustration: Binay Sinha
SREI Equipment Finance has come up with a lucrative non-convertible debenture (NCD) issue that’s offering the best interest rates in the current scenario. The coupon rates ranging from 8.5 per cent for 400 days to 9.6 per cent for 10 years.

The rates are better than the recently-concluded NCD issue of Muthoot Finance which offered up to nine per cent interest and much higher than the government-backed small savings scheme, which offers 7.4 per cent interest for a five-year term deposit.

Even company deposits from business groups with a good track record are offering up to 8.25 per cent for five years.

While the returns are attractive, investment managers say only those who understand the risks should invest in NCDs, and not just go by the rates. An investor needs to understand the company’s financial health and its prospects in the current business environment before taking a call. “Start with the credit rating. Then there are finer aspects of evaluating. Look at the reason for borrowing the money. Is the company borrowing for the working capital requirement, retiring debt or for expansion? Also, the track record and management quality,” says Suresh Sadagopan, founder, Ladder 7 Financial Advisories.

Srei Equipment Finance, for example, is a wholly-owned subsidiary of Srei Infrastructure Finance, which has been in the infrastructure business for over three decades. The group has been through different business cycles and never defaulted on any of its issuances.

Based on the company history, financials and the current interest rate environment, investment advisors say those in the 10-20 per cent tax bracket can consider tenures up to five years. But, 10-year could be too long a period to invest in NCDs of a private company. Also, it helps to diversify your investments in multiple issues rather than just putting them with one company.

NCD issuances slowed in the past financial year, because there was a liquidity surplus. But, finance companies have once again started looking at issuing NCDs, as banks are cautious to lend and also to diversify their lenders.

“In May and June, there will be four-five issues from non-banking finance companies (NBFCs) and housing finance companies (HFCs). An investor can split the corpus and diversify his investments over these issues, which will help bring the risk down,” says Ajay Manglunia, executive vice-president at Edelweiss Finance.

Those in the highest tax bracket also have the option to buy tax-free bonds from the secondary market. If you are unable to find suitable deals, some brokers can help if you have at least Rs 50,000 to invest. Government companies issue these bonds and are safe compared to NCDs of private ones. According to the data from the National Stock Exchange, the yield-to-maturity on actively traded bonds is between 6 per cent and 6.4 per cent. Financial planners also diversify across products. To get a slightly higher return from the overall debt portfolio, they suggest investing a small portion, up to 20 per cent, in NCD issues that have at least an AA+ rating.

Those who have retired and are looking for conservative preferences have the option of the Government of India’s savings bonds, which offer 7.75 per cent fixed returns (taxable), besides schemes for senior citizens. This year onwards, seniors will get an exemption of Rs 50,000 on the interest they earn from deposits with banks and post offices.