May 2020 Economic Times
After specific fund closure, brokerages are not willing to allow other trading limits for investors, who earlier availed credit limit against their debt fund.
After specific fund closure, brokerages are not willing to allow other trading limits for investors, who earlier availed credit limit against their debt fund.
Due to the disruption on account of Covid-19, there is further risk aversion and a flight to safety. Because of the credit risk aversion, investment in a basket of AAA rated government companies that have a target maturity date and low cost is the best option.
The GOI bond issued by the RBI is one of the safest investments that one can get in today’s environment and earn as high as 7.75%. The government has yet not cut rates here even though small savings are down.
Typically, a AAA rated paper trades 100 basis points over the 10-year GSec, while a AA rated paper commands a 200 basis points premium. Currently, the 10-year benchmark trades at 6.4 per cent, which means a AAA rated NCD should trade at 7.4-7.5 per cent and a AA rated NCD at 8.5-9 per cent.
Investors are looking to exit from preference shares. Investors primarily used to invest in preference shares as dividend income was tax-free up to Rs 10 lakh, and thereafter, it was to be taxed at 10 per cent. Technically, post budget, there is parity between interest and dividend income.
Tax-free bonds are the only instruments which are truly tax free and will carry that status till maturity as it was approved by parliament. There is interest amongst investors in these bonds especially after the budget, when dividend from preference shares started getting taxed, as per tax slab.
After the debacle of Infrastructure Leasing & Financial Services (IL&FS) in 2018, the magnitude of defaults increased as names with good credit ratings joined the list of defaulters. This spooked bond investors’ sentiment further.
Investing in SIB Tier 1 bond that yields 13.75 per cent could be a good investment now given the fact that SIB has a good track record and has been reporting profit quarter after quarter.
Post IL&FS default, it is prudent to invest in securities that are issued by central government or public sector enterprises. We suggest short maturity tax-free bonds. The bonds are listed on the stock exchanges and are available in secondary market as well.
The government has a 56 per cent holding in the company and has been giving timely support that is comforting for investors despite the weak rating of BBB-