Assess the credit profile of NCDs before investing
Non-convertible debentures may suffer liquidity constraints and are not completely risk-free
Muthoot Finance Ltd, a gold loan-focused non-banking financial company (NBFC), on Tuesday launched a secured non-convertible debenture (NCD) issue, offering returns between 7.15% and 8%, annually. The issue, which will remain open till 20 November, has a base issue size of ₹100 crore, but can raise it up to ₹2,000 crore , depending on the subscription. “We have so far raised a total of ₹15,099 crore via 22 public NCD issues since 2011," said Oommen Mammen, chief financial officer, Muthoot Finance.
The NCD has been rated AA with a positive outlook by Crisil Ltd and AA with a stable outlook by Icra Ltd. AA is not the highest rating that are assigned to bonds.
The NCD has a face value of ₹1,000 with a minimum application size of ₹10,000. Investors have six investment options with monthly or annual payout frequency or on maturity redemption payments with coupon in the range of 7.15-8.0% per annum. There are two investment periods—38 and 60 months.
“In the present scenario of lower interest rates and expectations of rates falling further, our issue offers safe long-term investment options with high stable returns to investors," said George Alexander Muthoot, managing director, Muthoot Finance, in the press statement.
The allocation to the NCDs, which are proposed to be listed on BSE, will be done on a first-come-first-serve basis.
Should you invest?
According to Kirtan Shah, business head, Sykes and Ray Equities (I) Ltd, since Muthoot Finance’s NCD issue is secured, it is relatively safe to invest in. According to Muthoot Finance’s website, secured NCDs are backed by the assets of the company.
“Muthoot Finance’s NCD issue is of reasonable credit quality. Except, for say, extremely cautious investors, one can look at investing in it," said Anil Rego, founder and CEO of Right Horizons, a Sebi-registered investment adviser.
But then you need to be cautious when investing in NCDs due to liquidity constraints and other risks involved.
“Liquidity is a challenge, as the Indian debt market is not that deep, and retail investors might find it difficult to redeem NCDs before maturity. Also, they should not consider these instruments as completely risk-free," said Shah.
Experts said investors can allocate around 20-25% of their overall debt portfolio towards such corporate deposits, but they should break it up across multiple companies, and be mindful of the risk. “People end up investing in NCDs for getting a return higher than what a bank fixed deposit (FD) offers without realizing that the risk level here is higher," said Rego.
Certain Indian banks are offering comparable interest rates on their FDs. For example, IndusInd Bank is giving 7% interest rate on one-three-year FD, which are considered less risky than NCDs.
Also, consider the tax aspect when investing in NCDs. The interest rate earned on these instruments is taxed at your income tax slab rate. “Some money can be parked in NCDs, which can be locked in for a longer period of time. The remaining amount can be invested in debt mutual funds, which are more tax-efficient and liquid," said Shah.
However, senior citizens should stay away from NCDs. “Instead, they can go for Senior Citizen Savings Scheme or PM Vaya Vandana Yojana, both of which offer 7.4% interest rate, and have far superior assurance and guarantee," added Shah.
Retail investors can look at having some part of their debt portfolio in NCDs, but before investing they should look at the credit profile of the company and must stay away from issues that rated below AA.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!