From ET
Many experts advise
individuals to take a call on NCDs only after considering their ratings and
post-tax returns, says Mr. Prashant Mahesh If a company goes bankrupt, secured
NCD holders will be paid off first
Two non-convertible
debenture (NCD) issues from Muthoot Finance and ECL Finance are available in
the primary market.
ECL Finance offers 12 % for its 70-months NCD
and Muthoot Finance offers tenures ranging from 24 to 75 months, with interest
rates varying between 10.5 % and 11.75 %
.
NCDs from Muthoot
Finance have an AA rating, while ECL Finance carries an AA rating.
“If you have a time
frame of 70 months and above, opt for ECL Finance as it pays higher interest
rates. If you have a shorter time horizon, go for Muthoot Finance,“ says Mr.
Anup Bhaiya, MD and CEO, Money Honey Financial Services.
He feels these NCDs
make better sense for investors whose income is not subject to tax, or / are in
the 10 % or 20 % tax bracket, and they can allocate 1015 % of their debt
portfolio to NCDs to earn higher returns.
Rupesh Bhansali, head
(distribution), GEPL Capital, asks investors to consider other factors like the
rating, liquidity and post tax returns before finalising investment in NCDs.
Match Investment
Horizon Financial advisors ask investors to choose NCDs based on their cash
flow requirements. For example, they would recommend NCDs of Muthoot Finance to
investors with shorter investment horizon, and ECL Finance to investors with a
longer investment horizon.
This is mainly
because it is not easy to sell an NCD if there is an urgent need for money .
Even though NCDs are listed in the stock exchanges, they are not traded
frequently due to their smaller issue size. “Invest in these NCDs only if you
plan to remain invested till maturity, else could end up selling them in the
secondary markets at a discount,“ says Bhansali.
Consider the Ratings
ECL Finance scores on the rating front, compared with Muthoot's AArating. The
NCDs of ECL Fi nance are unsecured, while Muthoot Finance offers a mix of
secured and unsecured NCDs.
The 75-month NCDs of
Muthoot are unsecured, while the rest of the NCDs are secured. Experts ask
investors who value safety to opt for secured NCDs.
“If a company goes
bankrupt, secured NCD holders will be paid off first by selling the company's
assets, and then whatever is left will be used to pay unsecured debtors,“ says
Mr. Harshvadhan Roongta, Chief financial planner, Roongta Securities. He prefers
secured NCDs of Muthoot Finance and ECL Finance.
Also, NBFCs carry
higher risk. Muthoot Finance is primarily a single-prod uct company de uct
company dependent on gold loans. Fluctuations in the price of gold could impact
its earnings, while ECL's is primarily into businesses relating to the capital
markets business. Any slowdown in the capital markets could affect its
earnings.
That is why many
advisors caution against going overboard on these NCDs. “If you have already
have invested in the earlier issuances of Muthoot and ECL Finance and do not
have a further appetite for unsecured and AA rated NCDs, you could avoid these
issues,“ says Bhaiya.
Calculate Post-tax
Returns
Since interest income
on NCDs is taxed, these instruments do not make much sense for investors in the
higher tax bracket. So, if you are in the highest tax bracket, the post tax
returns for an AA ECL Finance NCD would be 8.29 %, which is unattractive when
compared to other tax-free products such as the PPF, which pays you 8.7 % or / tax free bonds from PSUs in the secondary
market, which give you anywhere between 8.2 %-8.3 %
No comments:
Post a Comment