Home / Money / Personal Finance /  NCD interest rates may be high, but consider liquidity risks

Muthoot Finance Ltd has launched a secured non-convertible debenture (NCD) issue offering returns of 6.75-7.75%, annually. The issue has a base size of 100 crore, but the gold loan-focused non-banking financial company (NBFC) can raise it up to 1,000 crore, depending on the subscription. The NCD will remain open till 5 January 2021. “At a time when interest rates have significantly come down, we are able to offer attractive interest rates to retail and HNI investors," said George Alexander Muthoot, managing director, Muthoot Finance.

The issue has been rated AA with a positive outlook by Crisil Ltd and AA with a stable outlook by Icra Ltd. This rating means that the debentures carry low credit risk, but are not as safe as AAA-rated instruments.

The NCD has a face value of 1,000 with a minimum application size of 10,000. Investors have six investment options. You can choose between tenures of 38 and 60 months and three payout options—monthly, annual and on maturity. The coupon is in the range of 6.75-7.75% per annum, depending on the period and payout option you choose.

The allocation to the NCDs, which are proposed to be listed on BSE, will be done on a first-come-first-serve basis.

The NCDs are secured in nature, which means that in the event of liquidation, they will be backed by the company’s assets.

Investors should be cautious of risks when investing in NCDs. “Only aggressive investors, who have sufficient cushion for their basic safety and liquidity requirements, should ideally invest," said Nishith Baldevdas, founder, Shree Financial and a Sebi-registered investment adviser (RIA). Baldevdas stopped recommending NCDs to his clients after the DHFL incident.

Redeeming NCDs before maturity might be a challenge, as the Indian debt market is not that deep. Then there is the tax aspect. The interest rate earned on these instruments is taxed at your income tax slab rate.

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