Small saving instruments, govt bonds a good alternative to NCDs: Experts

According to recent media reports, over three-fourth of the non-convertible debenture (NCDs) issues from non-banking financial companies (NBFCs) that have hit the markets over the past 10 months have remained under-subscribed. This has happened even though NBFCs have offered mouth-watering interest rates in the range of 9.5-11 per cent.

The primary reason is high risk aversion among investors. “After the defaults and downgrades by IL&FS, DHFL, and a few others, the yield on debt papers of many NBFCs shot up. Many are facing asset-liability (ALM) mismatch. Investors have become very risk averse and only debt papers from reputed corporate houses are getting fully subscribed,” says Ashish Shanker, head-investment advisory, Motilal Oswal Pvt Wealth Management.

Experts are urging investors to stay conservative in their investment choices. “Pay attention to safety, liquidity, and only then to returns in your fixed-income portfolio,” says Rajesh Cheruvu, chief investment officer, Validus Wealth.

For ultra-conservative investors, bank fixed deposits (FDs) remain the foremost option. The State Bank of India is currently offering 6 per cent on its 211 days to less than one-year deposits, and 6.70 per cent on one-year to less than two-year deposits. By comparing rates and tenures online, you can boost your returns. IDFC Bank, for instance, is offering 8.25 per cent for a tenure of three years and one day. You may also park some part of your savings with small finance banks, which are offering up to 9 per cent for a three-year tenure. However, bear in mind that taxes eat away a considerable portion of the returns from FDs in case of investors in higher tax brackets.

Investors may consider overnight funds for their liquidity needs. They have given an average return of 5.93 per cent over the past year. “We see residual mark-to-market risk in liquid funds and are hence suggesting overnight funds to investors,” says Cheruvu.

Investors who cannot stay invested for a minimum three years (as is required to get long-term capital gains tax treatment in debt funds) may opt for arbitrage funds. These funds have given an average return of 6.09 per cent over the past year. They offer liquidity and enjoy tax treatment at par with equity funds. 

Investors with some risk appetite may opt for short-duration and roll down funds. These funds are offering a yield to maturity (YTM) in the range of 8-8.5 per cent. “Debt funds offer the benefit of a diversified portfolio, thereby limiting risk. Hence, they are a better option currently than NCDs, where one bets on a single issuer,” says Cheruvu.

Have an expert take a close look at the fund’s portfolio to check if there are any risky papers in it. By staying invested for more than three years, investors can get the benefit of long-term capital gains tax treatment (20 per cent after indexation). 

Another option investors may consider is PSU and Banking Funds. “They invest only in high-quality credit: debt from PSUs, banking sector, and from good corporate houses. Over a three-year period, these funds can generate gross returns of 7 per cent with superior post-tax returns compared to other instruments due to indexation and capital gains,” says Shanker. 

Investors may also opt for Government of India (GoI) Bonds, which offer an interest rate of 7.75 per cent. They have a seven-year tenure, are taxed at the marginal income tax rate, and can be purchased from both private and public-sector banks.

Post Office Small Saving Schemes are another ultra-safe option. Those with a five-year horizon may consider National savings Certificates (NSC), which offer 7.9 per cent. The elderly may consider Senior Citizens Savings Scheme (SCSS), which offers 8.6 per cent, while a long-term investment may be made on behalf of the girl child in the Sukanya Samriddhi Account, which offers 8.4 per cent.