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Low-risk, high-returns: Is now the right time to access corporate NCDs in the secondary market?

Submitted by admin on September 27th, 2024

Corporate NCDs are comparatively high risk than bank FDs as well as government bonds. Investors should look at purchasing bonds with good credit ratings which are traded at better yields and also have good market liquidity ranks.

Analysts are now speculating that the Indian government may also cut interest rates by 50 bps, following the US Federal Reserve’s decision.

Therefore, according to the experts it may be preferable to freeze the higher yields obtainable at present on better quality papers.

Risky compared to bank FDs and government bonds. Investors can consider buying highly-rated bonds that are traded with better yields and have good liquidity.

The US Federal Reserve’s decision to reduce interest rates by 50 basis points (bps) is giving rise to expectations that India might follow suit. Hence, experts say, it may be a good idea to lock in the higher yields currently  available on quality debt instruments.

For low to moderate risk seeking investors who want options other than FDs and debt MFs, Non-convertible debentures (NCDs) can be considered as a sound investment product. Currently, most highly valued NCDs with face values ranging from Rs 1000/- to Rs 10000/- are in circulation listed both in BSE and NSE markets.

However, corporate NCDs are relatively risky investment instruments than bank fixed deposits and government bonds. The available options are highly rated bonds which are traded and these bonds provide even better yields with good liquidity.

The latest NCD floated by Adani Enterprises created much interest among small investors due to which about 30% of the issue was reserved for the retail segment.

What are NCDs?

NCDs are floating-rate debt securities which are offered to the public by an entity for the purpose of generating long term funds. They are issued for a fixed term – generally a term ranging from one to seven years. The interest is paid either on a regular basis, which depends on how often the issuer needs funds; or at the end of the term.

Low-risk, high-returns: Is now the right time to access corporate NCDs in the secondary market? Corporate NCDs are comparatively high risk than bank FDs as well as government bonds. Investors should look at purchasing bonds with good credit ratings which are traded at better yields and also have good market liquidity ranks. Analysts are now speculating that the Indian government may also cut interest rates by 50 bps, following the US Federal Reserve’s decision.

Therefore, according to the experts it may be preferable to freeze the higher yields obtainable at present on better quality papers risky compared to bank FDs and government bonds. Investors can consider buying highly-rated bonds that are traded with better yields and have good liquidity. The US Federal Reserve’s decision to reduce interest rates by 50 basis points (bps) is giving rise to expectations that India might follow suit. Hence, experts say, it may be a good idea to lock in the higher yields currently available on quality debt instruments.

Bet on highly rated bonds Conservative players should pay special attention to the credit rating of required obligations — higher credit rating of every bond means lower likelihood of bankruptcy. As per data collected from HDFC Securities, NCDs by few corporate reputed like Tata Capital Financial Services, M&M Financial Services Ltd, and L&T Finance Ltd have the highest rating AAA. Some of the bonds that have been rated and given an AA are bonds that have been issued by Shriram Transport Finance, JM Financial Credit Solutions, and Manappuram Finance.

For instance, one can earn relatively higher returns in bonds with lower credit ratings because there are more likely to default. YTM On issuance of bonds, it is the coupon rate of interest is the annual percentage rate of interest to be paid. However, the coupon rate is non contractual in the second market where the bond may trade at a price that is less or more its issue price. Here, the YTM is what counts.

YTM is the rate of return calculated on the basis that the investor purchases the bond at the current market price and holds the security till the maturity and all coupon and the principal payments are received accordingly. According to HDFC Securities’ data, AAA NCDs provide yields in the range of 7.5-9 %. As for the price determination, liquidity is also essential — the higher the liquid the more efficient the price discovery.

This will escalate the cost of acquisition thus increasing the overall cost of selling a product. Taxation For instance, the interest from any NCDs are subjected to the tax standard of the investor depending on their tax band. The proceeds from the Act of selling NCDs in the secondary market are subjected to capital gains tax. In case you bought and sold NCDs within 12 months of the purchase, then you will have to pay tax as per the amount under the tax bracket. If you sell after 12 months, capital gains tax must be made at the rate of 12.5 percent. The indexation benefit is not applied.

Should you invest?

While the returns on NCDs are higher than bank FDs, they are vulnerable to credit and interest rate risk.935752 Broking and transaction charges on NCDs are important for the investors to consider, because even if they have to establish them by direct purchase, these expenses must be paid.

Some top-rated NCDs that are traded with high yields and good liquidity include Tata Capital Financial Services (865TCFS27 series ), Shriram Transport Finance (SRTRANSFIN YI),  and M&M Financial Services (BSE symbol: 935752) Investors should remember that buying NCDs will attract  broking and transaction charges.

“For taxable bonds, such investment instruments are best suited for investors who are not in the higher tax brackets and require an exit opportunity at any point in time,” said Deepak Jasani, Head Research, HDFC Securities.

With rate cuts lying in front of us as we speak, the yields on taxable bonds are expected to go lower still.

According to Jasani, while some corporate FDs promise yields that are close to those of taxable bonds, they include early withdrawal penalties.