Investing in NCDs - Factor in Post Tax Returns

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NCDs Post Tax Returns

Debt investors looking to earn higher returns may look this week at three non-convertible debentures (NCDs) from Srei Infra Finance, Muthoot Finance and Manappuram Finance. These NCDs come with tenure ranging from 400 days to 6 years. Interest rates on them range between 11% and 12.5%, which are 1.5-2.5% more than the rates offered by bank deposits. They also offer you the option of monthly interest, annual interest, cumulative option as well as option to double your money.

Investors whose income is not subject to tax or pay a marginal tax of 10%, could allocate 5-20% of their fixed income portfolio towards such NCDs. Those in the higher tax slabs can look at tax-free bonds for superior post-tax returns.

Experts also ask investors to look at the ratings of the NCD, and individual cash flow requirements and time frame of investments before investing.

Go for an NCD that commands a higher rating. Since these issue sizes are small, liquidity is likely to be low. So invest with an objective of holding till maturity.

Muthoot Finance and Srei Infra Finance carry a higher rating of AA-, while Manappuram Finance carried an A+ rating. Muthoot Finance and Manappuram are primarily into the gold loan business, which has seen a series of regulatory changes by the RBI over the last couple of years. Srei Infra followed by Muthoot Finance and Manappuram Finance. Experts ask investors not to get carried away by higher rates and invest only a small portion of their portfolio in such NCDs.

Work Out Post-Tax Returns

Muthoot Finance and Manappuram Finance give you the option of monthly income as well as an annual income, but Srei Infra has only an annual interest payment option. When it comes to interest rates, Srei Infra pays 11.5% for a five-year NCD, while Muthoot and Manappuram pay 12% for a five-year tenure.

Srei Infra, however, offers an additional 0.25% to existing bond holders as well as shareholders. If you wish to invest for five years, you can opt for Muthoot Finance. "If you are a shareholder of Srei Infra, and wish to invest for 5 years, opt for it. However, if you need a monthly income to meet your expenses or if you wish to invest for a lower tenure of merely 400 days, opt for Muthoot Finance," says Bhaiya.

However, it is important to calculate your post-tax returns before taking an investment decision. For example, if you fall in the 30% tax bracket, invest in the fiveyear bonds of Muthoot Finance. Even at the higher interest of 12.25%, your post-tax return would be only 8.46%. Since there are many tax-free bonds which offer higher returns than this, it doesn't make sense for those in high tax brackets to opt for these NCDs. However, if you fall in the 10% tax bracket, your return will be 10.91%.

Though these bonds will be listed on the stock exchange, most of them won't be traded regularly. That means if you need the money for an emergency, you may be forced to sell your investment at a discount, which could bring down your returns. That is why most experts ask their clients to invest in these bonds with an objective of holding till maturity.

 

 

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