DYK: Where to invest if your NCD issue is oversubscribed
Look for alternative investment options than keeping your money in the bank
Earlier this month, Dewan Housing Finance Corp. Ltd’s first ever public issue of non-convertible debentures (NCDs) got oversubscribed heavily soon after the issue opened. For retail investors, only 30% of the issue was reserved and allotment was on a first-come-first-serve basis, meaning you may not get any allotment. In that case, you should look for alternative investment options than keeping your money in the bank. The obvious solution is to buy in secondary market post listing. You can buy other corporate and tax-free bonds too, but this is more suited for informed investors as yields and prices fluctuate. You can also seek your adviser’s guidance.
Short-term income funds are mutual fund (MF) plans that invest in a variety of debt instruments, including corporate bonds, government securities and money market securities.
You should try to match your investment with the weighted average maturity of the scheme portfolio and remain invested through that period. Returns are market-linked and tend to fluctuate on a daily basis. But over a longer period of time, you can earn the portfolio average yield that reflects the weighted yield of individual bonds and securities held.
Short-term income funds have delivered an average return of 9.1% in the past 1 year and average annualised return of around 9% for the past 5 years. These funds are open ended; you can withdraw any time you want.
But keep in mind that exiting too soon could mean an exit load and also result in lower than expected returns in a market-linked product. These funds have a long-term capital gains tax of 20% with indexation if sold after 3 years.
There are bank fixed deposits (FDs) and company deposits to choose from. Bank FDs may not give you a high return, and for those in the highest tax bracket, these aren’t tax efficient. Company deposits can give higher returns but you have to be cautious about the credit rating of the issuing company. It is best to remain with high quality companies with a rating of AA+ and above. Also, see the interest rate offered on a company deposit, which should be higher than a similar maturity bank FD. Company deposits aren’t secured against any assets. The interest earned on FDs is taxed at marginal rate of income tax.
For senior citizens, the Senior Citizens’ Savings Scheme at 8.6% interest rate is a more tax efficient option than FDs and even some NCDs, which don’t offer high coupon. For those in the lowest tax bracket or those who don’t pay tax, post office schemes are also lucrative and a viable option for regular income. While choosing a product, check the post-tax returns and compare them across the various choices.
—Lisa Pallavi Barbora
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