Higher rates, but invest in tranches

For investors, who were looking for options in the debt instrument segment, non-convertible debentures (NCDs) are back in the reckoning.

L&T Finance, the financial services arm of construction major Larsen and Toubro (L&T), floated an NCD issue this week, and others such as Shriram Transport Finance is likely to follow suit soon.

For debt fund investors, who have been waiting for better interest rates, this is the first product offering almost 2 per cent more than similar products in the market.

The L&T Finance NCD is offering annualised returns of 8.5 per cent. The country’s largest lender, State Bank of India, is offering 6.50 per cent on three to five-year fixed deposits (FDs). HDFC Bank is offering 6 per cent for the same period and ICICI Bank is giving 7.50 per cent.

Even debt fund returns for a three-year period, ending February 8, stand at 7.30 per cent, as per data from mutual fund rating agency Value Research.

“While rates are likely to go up definitely, they will not come to the 8.5 per cent levels soon,” said R Shankar Raman, executive vice-president - finance, L&T Finance.

Companies would like to rush through their fund-raising plans through the NCD route because interest rate hikes have not taken place yet. Once FD rates start going up, they will have to offer higher rates to raise money.

For investors, while returns of NCDs are better than bank FDs and debt funds, the question is should they invest in such issues now or wait?

Financial planners say that one should not put all his/her money in such instruments on existing rate of returns. Instead, do it in a staggered fashion. Mukesh Dedhia, director, Ghalla Bhansali Stock Brokers, said, “We are advising investors to put small portions of money over a period of time in NCDs and other debt instrument. The idea is to have cash to invest in bank or company FDs later when rates go up further.”

The L&T Finance NCD issue opened on February 9 and will close on February 22. This is a three-year bond with two investment options - semi-annual and annual interest payment. The annualised return for the first option is 8.58 per cent and the coupon size is 8.4 per cent. The annual payment option pays 8.5 per cent with coupon rate at 8.5 per cent. The face value of each NCD is Rs 1,000 and a retail investor can make a minimum application of Rs 10,000.

N Sivaraman, executive vice-president, L&T Finance, said, “We are offering a good price compared to other fixed-income investment options available to retail investors. The differentiating factor in this issue is the tenure, since investors may not like to lock-in funds for a long period in this rising interest rate environment.”

But be aware of the risks as well. “They are safer than corporate bonds but less safe than a bank FD. Also, here you are taking a bet on one company and the risk of default remains,” said Radhika Gupta, co-founder, Forefront Capital.

And, not to forget, the overall earnings after tax adjustments will get reduced. “If you are in the 20 per cent tax bracket, then the total interest earned will be 6.8 per cent, and if in the 33 per cent bracket, then total earning is 5.69 per cent,” said Abhinav Angirish of www.investonline.com.

In comparison, capital gains of debt funds will be taxed at 10 per cent and 20per cent with and without indexation.