Fixed income investors can earn 6.75-10.4% on these NCDs

Mumbai Investors eyeing higher returns from fixed income instruments than bank deposits have four options to consider over the next few weeks. Four non-banking lenders, Muthoot Finance, Indiabulls Housing, Edelweiss Housing Finance and Ugro Capital have launched their Non-Convertible Debenture (NCD) issues that could return between 6.75% and 10.4% depending on the tenures of the investment. While the instruments will boost total returns of the fixed income portfolio, financial advisors, however, recommend limiting exposure to these NCDs as they do not enjoy top notch AAA rating.

The tenures of the NCDs are between 18 months and 10 years. Investors wanting to put money in NCDs need to have a demat account as they are listed on the exchanges. Many investors like this instrument as there is no tax deduction at source, unlike FDs.

As compared to bank deposits, which currently yield a maximum of 5.5-6% per annum, these NCDs yield 100-400 basis points more depending on their ratings. Muthoot Finance is the top pick among the four issues.

“Conservative investors looking for a strong business model and higher rating but comfortable with lower rates can make some allocation to Muthoot Finance,” said Anup Bhaiya, MD, Money Honey Financial Services. He said investors with higher risk appetite should go for NCDs with ratings lower than AA+.

“To increase the overall yield in your fixed income portfolio, you one can invest one-third of money in less than AAA rated paper. Within this allocation, you could have a maximum of 4-5% allocation to a single company,” said Ankit Gupta, co-founder, Bondsindia.com.

Investors should avoid public issues of companies where the same paper trades at higher yields in the secondary market, he said.

Amongst the current issuances, Gupta recommends investors with higher risk appetite to invest in Ugro Capital.

Financial planners said in the case of NCDs, it is better to opt for a duration of less than 5 years.

“Interest rates are slated to rise further, so investors can space out their investment over the next few months. Tenure of 24-48 months is preferred especially when the interest rates have not peaked as yet,” said Deepak Jasani, head of retail research, HDFC Securities.