Getting the Best Yield with NCDs

Interest rates are going up.

Banks are paying 9%+ to all investors and Seniors get 0.5% more.

But still investors are hungry and looking to get more for their money without scarifying the safety.

For past one year I have been recommending investors to scoop up the Non-Convertible debentures on issue.Those who could not get allotment on IPO can get them on secondary market paying a small % as commission. For a 5 year bond paying 11%, paying 0.5% commission eats up only 0.1% in the yield. But it is still good deal.

Even though many Indian investors speculate using these bonds, I don’t recommend these instruments be used for speculation.

As you can see in this table, there are few bonds that are available at 11%+ yield. Also these bonds offer regular direct credits to the bank account linked and also there are no TDS. So, senior citizens and investors below the taxable limits can enjoy the complete yield.

There are some information not revealed in this table. Some of these bonds even though show higher yield is not suitable for purchase now. For example Tata Capital N4 issue shows the yield to be 11.36% with a duration of 3 years. In fact, there is a call option on this bond that becomes vested in one year time. Market is trading with the assumption these bonds will not be called away. But if they do called away, the bonds will result in loss for new investors.

You may also notice some of the bonds are trading below par, it is because there coupon rates are lower than current market rates. This is what happens when you invest in long duration bonds at the time the interest rates are rising. But for the investors who are interested in higher yield and are not looking at the gains/loss from the sale, they are good. For example, L&T Finance N5 serious bond is selling at 952 but the face value of the bond is Rs.1000. This bond matures on 8-Mar-2013 and pays an interest of Rs.42 every 6 months on September and March every year. That is an yield of 8.8%. ( 84 divide by 952) And finally on 8-Mar-2013, the investor will get Rs.1000, that is another gain of Rs.50. Or 5%. If you divide that for 2 years, that is another 2.5%, giving you a total of 11.3% yield.

These bonds are traded in the market like stocks and offer good liquidity. So if there is any emergency, you may login and sell these bonds immediately. [ Note there are certain bonds who dont trade at all and offer poor liquidity ]

Final word: These bonds are good instruments for all investors. Should be part of every one portfolio. There are several bonds available in the market. Not all bonds are good. Companies have issued these bonds in several variations. Some are callable and some have put options. Some are secured and some are not. Some have longer duration like 10 years and some are shorter duration. These are the reasons for varying yield.

If you need help to find a suitable bond that would fit your portfolio, give me a call.

ref:

Trading-Non-Convertible-Debuntures

Sriram-transport-finance-NCD-debentures-11-interest-Opens-May-17-2010

1 Response

  1. NBG says:

    Hello RRK,

    I would like to avail your services to setup a comprehensive AAP. Is there an email address that I can reach you at?

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