With interest rates likely to come down in the next few months, investors might find fixed income instruments to be a good option. The longer the term, the better it is. One such option could be the non- convertible debentures issued by non- banking financial companies ( NBFCs).
IFCI's secured NCD issue, open for subscription till February 4, is offering 9.45 per cent to retail and high net worth individuals ( HNIs) for five years – 100- 150 bps more than bank fixed deposits of similar tenure.
The NCD with a tenure of five years and annual coupon pay out option has a coupon rate of 9.35 per cent for corporates and institutional investors. In the 10- year tenure NCD, the coupon is 9.4 per cent for institutional investors and 9.5 per cent for retail and HNIs.
The NCD issue has a rating ' A' ( stable) by rating agency ICRA. The NCDs are being offered for tenors of five and 10 years, with the option of annual coupon or premium on redemption. The face value of the NCDs is ₹ 1,000. In the case of the five- year NCDs, the value at maturity will be ₹ 1,563.87 for institutional investors and ₹ 1,571.04 for retail and HNI ones. In the case of 10- year NCDs, the value at maturity will be ₹ 2,457.5 for institutional investors and ₹ 2,480.08 for retail and HNIs. The NCDs will be listed on the stock exchanges.
Another way investors can benefit is through capital appreciation. According to experts, investors can expect five- eight per cent capital appreciation over the next one to two years, given that interest rates are head down. Ideally, one should not hold these till maturity. Since these will be listed on stock exchanges, if you sell after a year, you can get long- term capital gains tax exemption and have to pay only 10 per cent tax. In that sense, they are a better option than debt MFs, where one has to wait for three years to get long term capital gains tax exemption,.
The coupon offered by the IFCI NCD is 1- 1.5 per cent higher than bank FDs. However, the after- tax returns are lower than those offered by tax- free bonds. Hence, waiting for tax free bond issuances, which typically come out later in the year, might be a better idea. The post- tax returns from NCDs work out to 6.5- 7. If the coupon was higher at 11.5- 12 per cent, then maybe they would have been attractive.
In comparison, tax- free bonds are offering 7- 8.5 per cent.
However, keep in mind that allotment could be an issue for retail investors. The advantage of IFCI's issuance is that it is totally risk- free. However, there are other instruments offering higher returns. Corporate FDs offering higher rates would be a better option for senior citizens looking for interest income. For instance, company FDs of three year tenures are offering 9.5- 10 per cent. " A rate cut of up to 50 basis points would not affect the interest rates on debt instruments much, since it has already been factored
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
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