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In slump season for equity & debt, options to earn 10.5% per annum

Domestic shadow bankers are trying to lure retail money by offering double-digit returns.

, ETMarkets.com|
Last Updated: Aug 06, 2019, 01.34 PM IST
One thumb rule is to not invest in a debenture if the company allocates more than 50 per cent of their total assets towards unsecured loans.
At the time when investors are sweating it out to protect capital in Indian equities, not to talk about making money, the fixed income market is throwing up opportunities to earn mouth-watering returns of up to 10.50 per cent per annum.

As credit channels dry up and the equity market in the doldrums, domestic shadow bankers are trying to lure retail money by offering double-digit returns.

This week saw the launch of two non-convertible debentures (NCD) issues, offering up to over 10.50 per cent return per annum. Debentures of both JM Financial and IIFL Finance opened for subscription on Tuesday, offering 10.40 per cent and 10.50 per cent returns respectively.

Domestic investors are starved of choices in the financial markets, as the outlook for equities remains grim while in the risk-free asset space, debt funds have seen a general aversion following a few corporate debt defaults that hit net asset values, thereby eroding investor wealth.

NCDs are regular fund-raising instruments that companies often tap to fund expansion plans, retire debt, support working capital requirements and other general corporate purposes.

The instrument normally offers higher interest rates compared with bank fixed deposits. SBI, the country’s biggest lender by assets, offers 6.50 per cent return on fixed deposits of tenures ranging from 5 to 10 years.

Bandhan Bank is offering interest rate of 7.35 per cent on deposits with a tenure of seven days to 18 months. Senior citizens earn an additional 0.75 per cent over the slab rates for regular customers.

NCDs normally offer an interest rate of 8-12 per cent. The instrument is mandatorily rated by at least one credit rating agency. This gives investor confidence on the safety level of the issue. If an NCD has been rated by more than one agency, all ratings must be disclosed even if the issuer does not approve of any rating.

The NCD of JM Financial has been rated ‘AA’ (Stable) by both ICRA and Crisil while the IIFL Finance issue has got ‘Stable’ ratings from Crisil, Brickworks and ICRA.

Credit ratings help determine the financial position of the company. Non-banking lender IIFL Finance is looking to raise up to Rs 1,000 crore through the domestic bond sale. In January, the company had raised Rs 1,200 crore through the same channel, offering a coupon rate of up to 10.50 percent.

JM Financial is seeking to raise up to Rs 500 crore from the issue that opened on August 6 and will close on September 4.

Investors seeking to invest in an NCD need to do some background checks on the asset quality of the company before investing in an NCD.

Lovelesh Sharma, Head of Research, Epic research said, “Investors need to look at the company and its cash flows while investing in NCDs. Any misreading can hurt your investment to a great extent. It does provide the benefit of the long term investment for individuals who look to invest in comparatively safer instruments other than equities.”

Sharma also said that there has to be also a good stream of cash flows. Any company whose cash flows have a larger duration may not be attractive while a company that has no lag in cash flows from its business is likely to be a better option. Credit squeeze in recent times has already hit sentiments of investors and we are seeing its effect on the debt market.

One thumb rule is to not invest in a debenture if the company allocates more than 50 per cent of their total assets towards unsecured loans.

Also, one must ascertain that the company has kept aside at least 50 per cent of their assets towards NPAs, as this is a positive indicator of its asset quality. If the quality drops due to bad debts, this should be seen as a red flag.

Meanwhile, one asset class making the most of an uncertain financial markets is gold, whose prices have jumped over 15 per cent in the spot market on a year-to-date basis amid bleak equity market sentiment and a slowdown in global growth.

In domestic market, the yellow metal has risen to Rs 36,289 per 10 gm as of August 5 from Rs 31,531 on January 1. Likewise, the white metal silver has rallied nearly 10 per cent during the same period.
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