In a falling interest rate scenario, non-convertible
debentures (NCD) offer itself as lucrative investment avenue, when one could
lock-in higher interest rates for a longer term. NCDs are normally issued by
non-banking financial companies (NBFCs).
Higher interest rate
The NCDs carry an
investment term of five to ten years, while the interest rates are in the range
of 9.30%-9.50%, which are 100-150 bps points higher than the rates offered on
bank fixed deposits. NCDs come with the option of either annual coupon or
premium on redemption. Credit agencies assign ratings to the NCDs and one with
the highest rating is considered as a safe bet.
However, other than the coupon rate, there is one more
benefit attached with NCD if invested now. NCDs could give capital appreciation
benefits to the investors in the present environment, when the interest rates
are set to go down, NCDs could comfortably provide 5-10% of capital
appreciation. However, it is not advisable to retain NCD's until their
maturity. Rather selling these instruments on the stock exchange after a year
to get long-term capital appreciation for which exemption on long-term capital
gain is also available. In this way, NCDs present itself as better options than
debt-based mutual funds, where one has to wait for three years to get relief
from capital gains tax exemption.
Tax-Free Bonds and FDs
The post-tax interest
rates on NCDs are lower than those offered by tax-free bonds. Hence, it makes
sense to wait for the issuance of these bonds, which are expected to come later
in the year; NCDs would become ideal investment if their coupon rate is in
between 11.5-12%. Otherwise they fetch only 6.5-7% return post tax.
Meanwhile, corporate
fixed deposits are appropriate for senior citizens. As these deposits offer
higher rates that are lucrative to senior citizens looking for interest income
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