High-interest NCDs line up; choose well, advise experts

The returns of NCDs are based on their credit ratings, which are based on potential risks.

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These NCDs are secured and will be issued in dematerialised form only. Minimum application size is 10 NCD of Rs 1,000 each and thereafter in a multiple of 1 NCD.
MUMBAI: Non-convertible Debenture (NCD) issues of at least five finance companies are set to hit the market starting Friday but investors need to be a bit picky. Wealth advisors recommend locking into the NCDs of L&T Finance and Shriram City Union Finance, which are the best rated out of the five issuances. In the wake of the second policy rate cut by the RBI in 2019, the rates offered by these NCDs between 8.66 per cent and 9.75 per cent are attractive, they said.

“Even though RBI cut rates by 25 basis points, there are chances of further rate cuts going ahead. Given that rates on these NCDs are 200 basis points more than comparable bank deposits, it makes sense for investors to lock in at the current rates,” says Rupesh Bhansali, Head ( Distribution), GEPL Capital.

He advises investment in high rated debentures which have sound financials and are backed by sound management. For retail investors looking to invest the highest amount of Rs 10 lakh, Bhansali suggests L&T Finance’s NCDs. For investors looking to put beyond Rs 10 lakh, he recommends Shriram City Union Finance's NCDs.


The five NCDs other than L&T Finance and Shriram City Union Finance that are set to come up for bids are Magma Fincorp, SREI Infra and Muthoot Housing Finance will hit the markets beginning April 5. Their tenures vary from 400 days to as much as 10 years. Investors can choose to receive interest income monthly, annually or cumulatively at the end of the tenure. Including the option to retain the amount of oversubscription, these five issues together aim to raise Rs 3,050 crore. These NCDs are secured and will be issued in dematerialised form only. Minimum application size is 10 NCD of Rs 1,000 each and thereafter in a multiple of 1 NCD.

Investors could opt for longer tenure in these NCDs as shorter tenure investment involves reinvestment risk. “Investors could go for the 8 year option in L&T Finance and the 5 year option in Shriram City Union,” says Anup Bhaiya, CEO, Money Honey Financial Services.

The returns of these NCDs are on the basis of their credit ratings, which are based on the potential risks. While the AAA-rated papers of L&T Finance would return a maximum of 9.05 per cent per annum, Magma Fincorp, which is AA rated, will pay an interest rate of as much as 10.75 per cent per annum.

Post the IL&FS debacle, investors have turned wary of investing in non banking finance companies (NBFCs) especially those that carry a lower credit rating and those in sectors like infrastructure. Investors especially retirees and those in the low tax bracket find NCDs attractive due to the higher interest rates when compared to bank deposit. Also, there is no tax deduction at source. While a typical deposit of State Bank of India pays an interest of 6.85 per cent for a 5-year period, an NCD of L&T finance pays 9 per cent. In rupee terms, it means a gain of Rs 2,150 every year on Rs 1 lakh invested.

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