Some of the Non-convertible debentures (NCDs in short) which were floated not too long ago are still quoting at really good yields if held till maturity which I guess most people, not in need of immediate money, would think of doing.
In the scenario of falling interest rates, NCDs protect the investor from the falling returns on the fixed income instruments. The Cumulative Option protects the investor from the Reinvestment Risk as the returns (interest) are reinvested at the pre-fixed rate for the entire duration. Interest rates on five-year bank deposits now range between 9.25-10.75 per cent which is set to fall in future. Note that most of these NCDs are secured by way of the company’s long terms assets and hence though slightly risky do not usually bounce if from well rated corporate/NBFCs.
For e.g. consider Tata Capital NCD Option IV (Cum.) is currently available on the BSE @1389 (including 1% brokerage, slightly on the higher side). It matures on/has a buyback option on 5th Mar. 14 @1762.35 giving a yield of 12.65%.
Similarly India Infoline NCD Option II is available @1023 (excl. brokerage) but matures on 18-Dec-14 @1446.18 giving a yield of 12.22%.
Long term capital gains on listed securities are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. However, as the benefit of cost indexation is not available in case of bonds and debentures, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.
So it might make a lot of sense to buy these currently. If you sell these on the exchange, u pay only 10.3% as above, and if you hold them to maturity, you pay your normal rate i.e. 30.3% (assuming the highest tax bracket) but since these are about a couple of %age points higher than a bank FD, the net gain is still quite good.
A comparison between the two instruments is as follows:
| | Bank FD | NCD |
| Amount (Rs) | 10000.00 | 1389.00 |
| Duration (Years) | 3 | 2 |
| Coupon (Rate)% | 10 | |
| Amount on maturity (Rs.) | 13449.00 | 1762.35 |
| Pre-tax annualized yield (%) | 10.38 | 12.65 |
| Post-tax annualized yield (%) | 7.39 | 8.90 |
Still better, if you were to sell this NCD on the exchange, you will only have to pay 10% without indexation or 20% with indexation whichever is lower, increasing the yield further.
This is just an illustrative example and the actual values may vary slightly depending upon the exact date , compounding frequency etc. (for e.g. I have taken the period in calculation of the NCD yield as 2 years while it should actually be a tad higher from Feb ’12 to Mar ’14).
Thus it makes a win-win situation for the investor if here were to take advantage of the NCDs listed on the exchanges – you get higher returns either way - hold them to maturity or sell them on the exchanges. Going by the general expectation of softening of interest rates by RBI going forward, these NCDs would appreciate in value on the exchange making the latter also a very much viable option.
The other NCDs which I checked on were from IIFL and L&T Finance which are available for purchase on the exchanges. There may be more of these such as those from SBI, Shriram Transport etc who have all launched them in last couple of years.
