Fix your income with securities

If your heart beats faster with the swinging prices of stocks and equity indices. If you prefer earning a fixed return rather than following the ‘high-risk-high-return’ policy, it is advisable you park your money in fixed income securities.While the list of fixed income securities is long, SundayET brings a ready reckoner on non-convertible debenture (NCD), a fixed income security.NCDs are debentures issued by a company which do not get converted into equity shares. On maturity investors get the principle and the interest amount either periodically or in the end depending on the terms and condition mentioned. The year 2009 has seen several corporates issuing NCDs as these provide fixed returns to investors.

Tata Capital raised around Rs 500 cr in February through NCDs. Shriram Transport Finance and Tata Motors also raised funds by issuing NCDs. HDFC recently raised around Rs 4,000 cr through NCDs.Recently, L&T Finance has issued its NCDs to raise around Rs 1,000 cr. The issue is going to close on September 4. According to Veer Sardesai, MD of Sardesai Finance, the tax payable under the cumulative option is liable to only capital gains tax at 10% on maturity. This would give it a post tax yield of almost 9% per annum.Before investing in an NCD, one should look at several things such as credit ratings, credit-worthiness of the company and sector that the issuer belongs to. According to Zankhana Shah, head of Moneycare Financial Planning, rating of the NCD is important. The higher the rating better is the quality of the paper.

Many experts believe that parentage is very important. Rajiv Deep Bajaj, VC & MD of Bajaj Capital, the primary thing to look at is the company issuing the NCDs and the business group it belongs to. Also, one should check whether the NCD is secured or unsecured. Secured NCDs should be preferred for investment.Even in case of secured NCDs, the assets on which the charge has been created should be of good quality. Fixed assets such as land and building, plant and machinery are normally considered to be of good quality whereas inventory and receivables come lower down the order.The maturity period of NCDs is very important. The term of these securities should match your investment horizon so that the objective can be achieved. Experts emphasise on diversification. According to Shah, one should go for diversification within the NCDs. Not all NCDs should be from same sector and of same maturity plans.

According to Dhruv Agarwala, co-founder of iTrust Financial Advisors, there are many companies that have lined up NCD issues. Each issue needs to be judged on its own merits. One should carefully analyse the company’s strengths and weaknesses, financial strength and debt servicing capability.Some metrics to look at would be debt equity ratio and interest coverage ratio that give an indication of the company’s ability to service its debt. Other things to look at would be the yield at maturity, the maturity period, frequency of interest payments and ability to liquidate the investment to ensure that one’s specific requirements in terms of return expectations, time horizon, need for regular income and liquidity are met.A close comparison can be drawn with different kind of fixed deposits (FDs) to find out the advantages and disadvantages of NCDs over them. According to Sardesai, the main difference between a company FD and an NCD is that a company FD is not secured.

In an NCD apart from the name there also some physical security provided, which makes it a bit less risky. According to Shah, within the fixed income securities bank FDs are always referred as these give higher safety. According to Kartik Varma, co-founder of iTrust Financial Advisors, FDs offer more flexibility in terms of tenure.You can have a tenure of as low as 15 days and up to 5 years. NCDs tend to have longer time horizons and may go up to 10 years. According to experts, investors with fair knowledge of debt instruments should go for NCDs.According to Shah, many people even don’t know what is an NCD. Also, very conservative investors will not go for NCDs as they prefer bank FDs or other known debt instruments.

source:economictimes.com