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-
A basket of AAA rated government companies, target maturity date and extremely low cost are driving NRIs to this bond. There is seeing substantial interest from NRI families visiting India from London, Singapore and Dubai.
It is important that investors are clearly informed about the risk-return profile of the product so that there are not many negative surprises. Industry experts say the product will give the option to investors to match their goals with maturities of the underlying bonds.
There is safety and no credit risk in both GOI bonds. In addition, investors earn a good 100-125 basis points higher than bank deposits.
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.