Bonds are back in business as FD returns fall
Updated: Aug 18, 2016 11:29 IST
MUMBAI: Fixed deposits are one of the most common investment avenues for Indians.
But as interest rates offered on FDs fall, non-convertible debentures (NCDs) offering higher returns can offer a better way to invest money for the long term.
Debentures are bonds, which are issued by companies to borrow money, that can be converted into shares of the company upon maturing. NCDs do not offer that convertibility.
NCDs offer a fixed annual return, called their coupon rate. A coupon rate of 10% on a ₹1,000 NCD will mean you get ₹100 every year as dividend.
Early August, Dewan Housing Finance came out with its public issue of NCDs that has a coupon rate between 8.83-9.30% per annum, depending on three-year, five-year or ten-year tenures.
The FD interest rates on the hand hover at around 7.5%, which is the maximum interest rate offered by State Bank of India and ICICI Bank, the country’s two biggest lenders.
Mahindra and Mahindra Financial Services’ also issued debentures that offered interest of 8.7-8.8%.
“NCDs offer long-term opportunities and since they have higher yields than bank fixed deposits, post-tax returns will also be higher,” said Vidya Bala of FundsIndia.com. However, just like stocks, an investor must invest in a basket of NCDs to spread risks, she added.
Between April-July 2016, five companies came out with their public issue of NCDs, raising a total of about ₹2,400 crore. In the same period last fiscal, there were three public NCD issues raising ₹801 crore.
Investors too seem to be lapping up these bond issues. DHFL’s public issue of AAArated NCDs to raise up to ₹4,000 crore, got subscriptions of near ₹18,749 crore. Buoyed by the success, DHFL is planning another issue of NCDs to raise ₹10,000 crore via one or more tranches.
Financial advisors also insist on verifying credit rating of bonds and the track record of a company before investing.
“Investors get driven by the rate of returns offered. But higher rate of returns also comes with a higher cost, which could be big enough to wipe out their capital (if the company is unable to pay). So, investors should only invest in bonds that at least have AAA rating,” said Ankur Kapur, founder of Ankur Kapur Advisory.