Factors such as management, annual accounts, rating and past track record of the company should be looked at before investing. Only if you have the ability or resources to analyse company financials is it worthwhile to invest in company deposits.
There are two prominent risk attached to NCDs. One is repayment of principal and interest and second is liquidity in the secondary market. I will suggest only AAA-rated securities with strong management such as TATA Capital, M&M Finance, L&T Finance, Bajaj Finance, HDFC and LIC housing Finance. Investors should also be aware of risks associated with NCDs.
There is a trust deficit among investors. Investors are not investing any fresh funds into debt funds, as some NBFCs and mortgage firms have defaulted on their principal/ interest repayment. After the IL&FS episode, rating agencies have become very alert in assigning ratings.
Retail investors are now holding patient as institutional lenders are busy finalising the resolution details. They are now following the basics. Just make their presence felt in the large scheme of things. All such retail bonds are secured as the borrower paid interest/repayments regularly until a few months ago. We do hope retail investors’ interest will be taken duly care by all concerned parties.
These bonds currently yield 5.5- 5.9 per cent, compared with 6.1-6.5 per cent a month ago. What makes these attractive to the ultra high-net-worth individuals is that the returns are tax free — that is an enticement for those who are taxed at as high as 42.74 per cent as per the new tax proposals. If the tax benefit is accounted for, the “return for the highest tax-bracket investor will be more than 10 per cent, making for an attractive investment opportunity.
The regulatory push from Sebi which mandated liquid funds to hold 20% of their assets in safe treasury bills and government bonds is also driving this buying.
It is a positive development. Since October 2018, all the financial and operational creditors are waiting for some concrete resolution plan. And now they see some ray of hope from NCLAT (National Company Law Appellate Tribunal) and from the new management. Potential buyers are showing interest in acquiring productive assets of IL&FS subsidiaries. The mutual funds will get their outstanding dues if they have invested in those specific subsidiaries or SPVs (special purpose vehicles).
Investors should prefer nationalised bank perpetual bonds backed by the government. Despite the NPA problems these banks have honoured their commitment in the past. About six state-owned banks, including IDBI Bank, Bank of Maharashtra, Dena Bank, Uco Bank, Corporation Bank and United Bank of India, have bought back ?13,000 crore-14,000 crore worth of perpetual bonds and repaid investors in full.
The merger between REC and PFC has apparently triggered concerns among a section of investors who believe a rating downgrade is likely. Investor risk perception has changed in the past eight months.
If the matter (of liquidity constraints) is not resolved on an urgent basis, it can lead to trust deficit and will take a very long time to rebuild lost confidence. “Over the past two decades, debt funds were considered a good alternative to fixed deposits of banks/post offices/NBFCs and corporates.