BackPFC NCD issue: long term options attractive for those in lower tax bracket
There are not many fixed income products available to retail investors that offer rates between 6.82% and 7.15% for the long-term and for investment amounts as low as ₹10,000
PremiumMUMBAI: State-owned Power Finance Corporation (PFC) Limited will offer non-convertible debentures (NCD) from 15 January.
The company is offering lower rates for short- and medium-term tenures, which are similar to what a public sector bank is offering on fixed deposits at present.
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For the long-term, rates are slightly better compared to other products available. PFC is also offering the option of floating rate on 10-year NCDs.
The base issue size is ₹500 crore, but PFC can retain over-subscription of up to ₹4,500 crore. The total issue size, therefore, can be up to ₹5,000 crore.
NCDs will be available in demat format, and investors can use UPI (unified payment interface) to make the payment.
NCDs will have a face value of ₹1,000 each, and the minimum investment amount is ₹10,000. The last day of the issue is 29 January, but it can close earlier depending on the response.
Let's look at whether you should invest in the PFC's NCDs or look at other options.
COUPON RATES
For three- and five-year tenures, coupon rates are 4.8% and 5.8%, respectively, for retail investors. State Bank of India offers 5.3% rates on deposits between three years and less than five years and 5.4% on 5-10-year deposits.
Retail investors are those who make an application of ₹2 lakh or less in such issues.
PFC offers better rates for the long term, and there's also the option to get quarterly interest payouts. For three and five years, investors can only get a yearly payout.
"Whether you should invest for the long term depends on the outlook on interest rates. I believe that we will have a low-interest rate regime in the future. Would, hence, suggest that locking investment in PFC's NCD issue will benefit those who are looking at fixed income instruments," said Arnav Pandya, founder of Moneyeduschool, an Ahmedabad-based financial literacy initiative.
For the 10-year tenure, rates are 6.82% if you opt for quarterly interest payment and 7% for annual payout.
There's also an option to choose a floating rate, where the interest changes every year. The rates are benchmarked to 10-year government securities.
The 15-year investment tenure rates are 6.97% and 7.15% for quarterly and annual interest payouts, respectively.
OTHER OPTIONS
There are not many fixed income products available to retail investors that offer rates between 6.82% and 7.15% for the long-term and for investment amounts as low as ₹10,000.
One of the safer alternatives to PFC's NCDs are Floating Rate Savings Bonds, 2020 (Taxable). The government offers 7.15% rates on them at present. But their interest rate could change every six months.
Post Office Small Savings Scheme, backed by the government, has better rates on its fixed deposits (FD) for the short- and medium-term. The rate for a three-year deposit is at 5.5% and 6.7% for the five-year tenure.
As interest rates are low, many investors recently turned to guaranteed returns plans from life insurance companies that offer post-tax returns of around 5%. The NCD issue could work for such investors. Depending on the investment tenure, those in the highest tax bracket can make about 4.8-5% post-tax returns.
"The interest rates are attractive for the long term investment for those in the 20% tax bracket or below that.Those in the higher tax bracket looking can lookin at the issue only if they need a regular payout," said Steven Fernandes, a Sebi-registered investment adviser and founder of Mumbai-based Proficient Financial Planners.
For seniors, there are other options with a sovereign guarantee that offers higher returns. They should first exhaust the investment limit in the Senior Citizen Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana before considering the PFC's NCD issue.
Before you invest in this NCD issue, remember that these could have liquidity problems if you want to exit before the tenure ends. Even though companies list their NCDs on stock exchanges, the secondary market for such debt products doesn't have significant volumes. Investors, who would want to exit, may have to do so at a loss.
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