Bank fixed deposit rates are not having their best run right now. But if you’re an investor who prefers fixed income options and is willing to take some risk to earn higher returns, it’s raining options.
NCD (non-convertible debenture) issues of three companies — L&T Finance, Shriram City Union and Magma Fincorp — are open for subscription now. All three companies are offering secured, redeemable NCDs for tenures ranging from two to 10 years. Of the three, L&T Finance offers a good risk-return proposition for investors.
AAA option
L&T Finance’s offer is rated AAA by ICRA, Care and India Ratings, denoting the highest degree of safety regarding timely servicing of financial obligations and the lowest credit risk. It is in this aspect that L&T Finance scores over the other two companies.
L&T Finance’s NCDs are available for a range of three to eight years. The interest rates for retail investors vary from 8.66% to 9.05% depending on the tenure as well as the mode of interest payment (see table). While the three-year and five-year NCDs have a cumulative interest option, the eight-year option does not. The minimum application amount across all series is ₹10,000 (10 NCDs of face value of ₹1,000 each).
Shriram City Union’s credit ratings are lower than that of L&T Finance at AA+ (Care) and AA (Crisil). Magma Fincorp scores lower, rated AA by Brickworks and Acuite.
Thus, while the superior returns offered across tenures for these two companies (see table) look attractive, the associated risk is also higher. These may be suitable only for investors with a high risk appetite.
The three-year cumulative option in L&T Finance that offers 8.9% is for those with a conservative risk-return profile. An interest pay-out option is also available for the three-year NCDs, but it provides only an annual pay-out and may not make much sense for investors looking for regular income. By investing in the cumulative option instead, investors can get the benefit of compounding of interest rate.
With the RBI cutting rates in its Monetary Policy announcement for the second time in a row last week, there is little chance of deposit rates moving up in the near term. Already, the rate offered by L&T Finance in this tranche is lower than in the earlier issue in March 2019. The company offered 8.89-9.35% across various tenures then.
In this scenario, a three-year time-frame will give investors the opportunity to lock into higher rates now, while at the same time giving room for reinvestment elsewhere at a higher interest if the rate cycle changes three years down the line.
The five-year cumulative option which offers only about 10 basis points higher rate at 9% but entails a lock-in of an additional two years, seems less ideal as it is difficult to predict the trajectory of interest rate movement over such a long period.
The 8.9% offered by the three-year NCD is superior to comparable NBFC deposits. AAA rated NBFCs such as Bajaj Finance, LIC Housing Finance, PNB Housing Finance and M&M Financial Services offer between 8.25 and 8.8% for a three-year term.
Private and public sector banks offer 6.5-8.25% for three-year deposits at present. Some small finance banks such as Fincare, Jana and Suryoday offer 9% returns on three-year deposits. Thus, this NCD can help you diversify your fixed-income portfolio if you have exhausted these options.
The NCDs will be listed on the BSE and the NSE. Hence, you can sell it in the stock exchange before the end of the tenure. But note that liquidity may be low.
The interest income on the NCD will be taxable at your slab rates, while the sale of the NCD in the stock market will attract long/short-term capital gains tax.
About the company
L&T Finance scores reasonably well on financial parameters. The October-December quarter saw its assets under management increase 22% year-on-year to ₹94,711 crore. Its gross NPAs have come down to 6.74% from 10.4% a year ago, while net NPAs have reduced to 2.64% from 4.74%. It is well-placed on the liquidity front, too.
( This column is for information purposes only and is not a recommendation to invest )
