#Sovereign #gold bonds make a comeback for Indian investorswith 5th tranche on Sep 1, 2016

What is on offer

Govt.of India announced launching of 5th tranche of #sovereign #gold #bonds,hitting the market, issue opens on 1st September and closing on 9th Sept, 2016. The offer is strictly for Indian residents, institutions, university, charitable institution etc. The gold bonds are priced at Rs. 3150/- per unit, signifying 1 unit is equivalent to 1gm of #gold. One can apply for 1gm and maximum of 500 gms. The tenor of the bonds is 8 years with exit option 5th year option. It also earns interest of 2.75% on the initial capital investment payable semi-annually. The investment amount is protected upto the no of units and the eqivalent amount of the gold prices.

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Why invest in Sovereign gold bonds?

1. It’s a paper form of gold, no issues of storage and safety
2. It earns you interest on the capital invested.
3. It can be used as loan collateral (Loan to value ratio to be maintained as guided by RBI)
4. It can be traded on demat format
5. Long term tax exempted on redemption

Disadvantages

1. Unlike GOLD ETF, it has moderate liquidity (cannot be sold as easily as GOLD ETF)
2. The premature transfer will attract capital gain tax
3. Only demat format can be traded, paper format will not be available for trading in stock exchanges.
4. Your bonds will be redeemed on maturity, while  in case of GOLD ETF, you can keep it as long as you want.
5.There is no guarantee of capital protection on the amount invested, only the units which will be protected, the redemption amount will be based on the prevailing gold prices.
6. Interest earned will be taxable as per taxation laws in india

Term Life Insurance in India – essentials

Term insurance is the pure form of life insurance, wherein the policyholder pays a premium to cover his/her death risk for a particular sum of money for a particular term i.e.15, 20, 25, 30 years and so on . On demise of the policy holder within the term, the nominee (the beneficiary) is entitled to get the sum assured in lump sum or deferred manner as mentioned the policy contract. If the policy holder survives the term he is entitled to no payment/ #maturity benefits. This policy is highly recommended for the earning members of the family with dependants.
What is an ideal life insurance amount for you?
While choosing an ideal #insurance product, one need to do basic calculation of future monetary requirements based on the laid out financial goals, it cannot be a guess work.
Please write down the present costs you would incur for the following purpose
  • Elderly parents to look after
  • Present age of children and their future needs for education
  •  Do you have a working spouse? If not, her lifelong expenses on health and living

Though exact cost you may not be able to arrive at, please click to find the future costs (inflation) and expenses of education, marriage, living standards etc.Adding up these costs would help you arrive at the right amount, your ideal insurance cover. Still, if you are confused, multiply your yearly income with 10. This should be your ideal sum insured.
Ex – If your yearly income stands at 10 lakh, sum insured should be Rs. 1 crore.
What is the premium you need to pay for this insurance product?

The premium of a term insurance is calculated on few factors.
1. Age of the applicant – With each passing birthday you would need to shell out extra money as premium to buy a new policy, however, it remains the same through the term. So, early entry gives you a good deal. Buy a term plan before your next birthday to save on premium
2. Health of the applicant – It plays an important role too. Two persons of same age may get different quotes for premium depending on the medical history and current health of the applicant. 
3. Lifestyle – For example there shall be significant difference in premium for Smoker and a non-smoker of same age and health.
4. Policy term – You may chose the policy term depending on the offer and your needs, usually 10 -40 years, higher the policy term , higher will be the premium
The reasons why you should buy term Insurance is peace of mind. It buys you a adequate protection at a very low cost.
Parameters to chose the right insurance plan

For the same amount of sum assured, different insurers would quote different pricing. The points we should look at –

1. Inclusions and exclusions – This means, what are the exact conditions to be satisfied by the policy holders to receive the claim amount. Reason of death is one point insurers look at very closely for the payment of claims. Insurers may not cover unnatural deaths, suicide, death due to drug/alcohol etc.
2. Claim settlement ratio of the insurers – While comparing premiums, one must not ignore the CSR. It indicates the percentage of claims honoured on death of the policy holders in the particular year. A high percentage makes the insurers more dependable
3. Additional benefits – In addition to the basic life cover, insurance companies have added many additional features like accidental death benefit, permanent disability benefit, critical illness cover and deferred payment options to ease the burden of the policy holders

Tax Benefits on term insurance
On premiums paid and benefits received as per section 80C and 80D of Income Tax Act,1961.

Disadvantages of term plans
1. No maturity benefit on survival
2. Policy may lapse on not honouring 30days grace period for premium payment. And ou have to buy  new policy all together
Top insurance companies based on claim settlement ratio 2015-16
Insurance Provider
Death claims received
Claim settlement ratio
Death claims paid
Claims pending
Per  claim average value (Rs)
LIC
755,901
98.19%
742,243
0.5%
120,654
Max Life
9,223
96.23%
8,804
0.1%
278,816
ICICI Prulife
12,309
96.20%
11,546
0.8%
305,612
HDFC Std
12,189
95.02%
11,031
2.3%
238,890
SBI Life
14,876
95.70%
13,303
3.2%
229,572
Tata AIA Life
3,873
94.47%
3,659
1.0%
241,241
Star Union Daichi
1,266
94.08%
1,191
0.3%
285,306
PNB MetLife
2,466
92.90%
2,290
1.5%
448,821
Bajaj Allianz
20,661
91.30%
18,978
3.0%
183,291
Kotak Mahindra Life
2,686
90.73%
2,437
3.2%
296,143
AegonReligare
460
95.30%
413
0.2%
744,068
Top 5 basic online term insurance plans in India for #non-smoker, healthy female, age 30 years, Cover for 1 crore based on CSR, term and premium cost

Insurer
Policy Name
Policy Term
Premium
Max life Insurance
Online Term Plus plan
35 years
Rs. 8970/-
Aegon Religare
(No. of policies claimed is very less)
Aegon Life iTerm Insurance Plan
35 years
Rs. 8395/-
ICICI Prudential
iProtect Smart Lumpsum Plan
35 years
Rs. 11,900/-
HDFC Life
Click 2 Protect Plus
35 years
Rs. 11,630/-
PNB Metlife
Mera Term Plan-Full Lumpsum payout Plan
35 years
Rs. 9258/-

The chart data source: Policybazaar
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Banking simplified with #Unified payment system #Cashless transaction

What is Unified Payment System #UPI
Cashless transactions in India to become more common with UPI, a recently launched smartphone based #payment system that lets money transfer and remittance service between bank accounts, merchant payments without divulging sensitive information like credit card numbers, #netbanking psswords, #IFSC codes. It can be used for bank transfers, bill payments, #merchant payments online and offline.
·         National Payments Corporation of India (NPCI) officially launched the facility for 19 banks.
How to get started
·         UPI app of banks will soon be available on Google Play Store for download
·         You only will need to get the app and install in your phone, set up the login details t create a virtual address
·         Add bank account details, Set M-Pin
·         Start transacting using UPI
·         UPI system will allow you to transfer funds safely and instantly as an SMS.
Use it for –
1. Bank transfer
2. Electricity/ phone/ credit card bill payments
3. Buying movie tickets/ railway/ airline tickets
4. Online shopping
5. Insurance premium payments
6. Donation
7. School fee
And replace many other cash payments
List of banks – #Andhra Bank, #Axis Bank, #Bank of Maharashtra, #Bhartiya Mahila Bank, Canara Bank, Catholic Syrian Bank, DCB Bank, Federal Bank, ICICI Bank, TJSB Sahakari Bank, Oriental Bank of Commerce, Karnataka Bank, UCO Bank, Union Bank of India, United Bank of India, Punjab National Bank, South Indian Bank, Vijaya Bank and YES Bank

News source: Livemint, BusinessLine

Good news for the Indian investors, fewer bank representatives will push you to buy wrong insurance plans #ULIPs #bankassurance

Personal finance take on IRDA’s latest move on banning incentives to bank staffs

IRDA bans incentives to bank stuffs, #bankassurance

Impact –
1. To help lower misselling of insurance products by bank representatives. #bankassurance

2. The structure remains untouched for the other agents with 7% incentives over and above the commision.

3. The affect on the premium difference or anyother service differential is yet to be seen post this development.

The overall commision expenses have reduced over last decade, however, it still remains a costly affair for the investors.

The commision on sales still remains very high at 35-40% on the first year, 7.5% at the seond year and 5% for rest of the tenure, especially for the offline products

While online counterpart offers better pricing compared to these agent/ bank led products, one need to be careful to compare the exact offerings and the difference in benefits, if any.

#newsyoucanuse

10 Reasons why you should avoid Endowment Insurance Plans and chose Term Plan instead

10 Reasons why you should not by endowment insurance plans, slide show#

Endowment plans (Life insurance product) especially made popular by #LIC since mid 20th century, are very popular products in Indian households because of its high pitch campaigns and rampant mis-selling by insurance agents. Due to limited knowledge on the return calculation and conservative mindsets for investments, Indian population often fall for this wealth eroding instrument. Let us at look what these insurance cum investments/ savings plans actually offer.

These plans offer a sum assured on the maturity and added bonus componen accrued over the tenure. It cover death benefit upto sum assured and additional bonus component upto the premiums paid by the investor till the tie of death. Though it sounds very simple, I have found atleast 10 reasons, we should avoid this age old dominant insurance product.

1. The premium is exorbitant compared to the assured returns

For an insurance cover of 1 lakh, endowment plan would cost about five thousand; a term plan would approximately cover you for 50 lakhs in the same amount (considering the applicant is 30 years old)

2. It doesn’t adequately cover risks
Sum assured compared to the premium is very low. Hence, people end up buying a very low coverage sum assured compared to the actual requirement

3. The returns are not comparable to the rising inflation
Thumb rule of investment is projected return should beat the inflation numbers. If you rightly calculate the bonus payment in addition to the sum assured, on maturity, the return is no more than a 4% y-o-y appreciation of the total investment, while India is fighting inflation at 6-8% in last few years.
This investment is actually eroding the capital  

4. Very high cost of investment
For a 10 lakh cover, it costs about 50,000 a year, while a Term Insurance plan would do the same for just 1 thousand

5. The allocation charges, expense break-up are hidden
Endowment plans in India doesn’t disclose the break-up of agent commissions, asset allocation charges, expenses, allocation for sum assured, death benefits etc, while in other investment products like #ULIPs, #mutual funds, it is mandatory disclose actual break–up   

6. It is a complex product Insurance + Investment and fails in both area  
To attract the attention of conservative investors who strive for capital protection at any cost, the category mixes two benefits, making it a poor product for both the needs, neither it is capable of providing adequate cover, nor giving any opportunity of wealth creation  

7. The Bonus component is the biggest joke, offers simple interest, missing out on the Power of compounding
The ‘BONUS’ element in the endowment plans is the biggest miss-selling point used by the agents. The Insurance Company announces a yearly bonus, this is not given to you yearly, is added to your sum assured kitty. But, the bonus component varies every year, and it doesn’t get accumulated as compound interest, it stays the same, without earning a single penny interest on it. So, for example in an 20 years policy, if you earned Rs. 5,000 in the 5th years as a bonus, it will remain 5000 till the 20th year, without earning any interest on the amount.  

8. The agents/ brokers push and miss-sell because, they get a high commission on this
There has been enough media bashing over high charges on #ULIPs, which #IRDA promptly lowered and capped the expense charges making it a bit better product for the investors. But, endowment plans charge as high as 40% of the premium in the first year, there are also high recurring charges attached to it

9. There is a requirement of pure insurance, keeping it clutter free
#Life Insurance is an important element of over-all financial planning. It is meant to cover life risk of a earning member in the family. It must cover atleast 3 times the annual income of the member, which ensures a financial cushion during a time of trauma and despair. A term insurance product is perfect answer for this. It has low cost structure and offers only death benefit and sometimes critical illness/ permanent disability cover for an additional cost. The premium difference between endowment and term plan is as huge as 80% which can be invested efficiently.

10. There are much better options available for wealth creation in the long term
The sentiment behind endowment plan is mostly having an extra income/ pension post retirement. But the product fails to deliver on the area because of its complex nature and high cost structure. If you are conservative investor also, you may consider dividing the remaining amount in two parts, one for monthly/ quarterly/ yearly PPF contribution (enjoys triple tax exemption benefit and return of 8-8.5% annually). The remaining part can be invested in Systematic Invest Plan (SIP) in a hybrid fund/ balanced mutual funds(about 60% equity 40% debt), will earn you over 12-14% annually over long term. [Note: When a mutual Fund invests 60% of its AUM in equity, it is considered to be an equity mutual fund for taxation purpose, and the return earned on the same over 1 year is exempted from taxation]

Sovereign Gold Bonds or GOLD ETF. Which one is your cake?

  •      GOLD ETF thrives on high liquidity, can be converted into physical on 1 kg of gold, NRIs can invest too
  •        SGB offers interest on investment and capital gain tax exempted on redemption

Gold has been one of the oldest currency/ investment instrument world-wide. It is used widely as currency hedge, hedge against #inflation, and safe heven during various economic or political crisis. In India #Gold has a very special place. It is a popular investment choice among Indian households. However, the mode of investment is Jewellery and it is an emotional choice on rather than a well thought out investment choice, it is mostly bought as a wedding gift for the bride as “Stri Dhan” as it is referred.
There are many theories on the ideal exposure on this asset class, but no-one can deny that a portion of wealth should be kept in Gold, may vary from 10-20% of total portfolio, as its price tends to increase with the rise in the cost of living.
Jewellery, coins and bars – Asset with emotions attached
Though the asset class is important, investing in this has been a high-cost and difficult one. In Jewellery and gold bars, there many concerns like safety and storage, purity concerns and difficulty in trading. It also attract high taxation. It comes at a premium adding making charges in the range of 8 -25%, it my further vary depending on the seller.
GOLD ETF – Buy any day/ sell any day/ keep as long as you want
Last decade has seen a gradual but major shift in investors’ taste, with Mutual Fund companies offering GOLD ETFs and Gold FoF (Fund of Funds). GOLD ETFs are nothing but open-ended funds that trade on a stock exchange just like equity shares. Gold ETFs can be bought anytime like equity shares, can be bought anytime with minimum investment of 1 unit. Gold FOFs are predominantly used for SIP facility (monthly recurring investment) investing in Gold ETFs to accumulate Gold over a period of time. This is stored in dematerialised format, so no fear of theft or storage concerns. Though it comes under long term/short term taxation depending on the investment horizon, it doesn’t have any wealth tax attached. This is the most liquid form of Gold investment.  

NRIs can Invest in Gold ETF through trough exchanges with registered PINS account.
Gold Sovereign Bonds – Only form which pays interest
There is a new entrant in the market for investing in Gold, Sovereign Gold Bonds. Introduced in H2, 2015, bonds are issued by RBI in tranches on behalf of Government of India.
Sovereign Gold Bond Scheme, is an alternative instrument for holding Gold. Investors can simply apply through designated Banks/ PO/ NBFC and NSE brokers for investing in the SGB scheme in Paper/ Demat format. n a paper form through Sovereign Gold Bond Scheme. The under-lying asset for these bonds is Gold. These bonds will track the price of gold. The bonds also offer 2.75% interest income on the initial investment amount paid semi-annually to the investors. Minimum investment amount is equivalent to 1 gm of physical gold. 
The minimum tenor of the bonds are 8 years however, there is exit options  in 5th, 6th and 7thyear and it has a fixed tenor. The bonds are tradable in stock exchanges for those who holds the bonds in demat format. It doesn’t attract any capital gain taxes on redemption, however, interest pay out and early exit attract taxes as per long term/ short term gains.
Though the investment format is good, liquidity is low with exit option after 5 years with fixed tenor for maturity and the liquidity on exchange transaction remains to be seen.
So far in One year, Government of India has mobilised investment worth 2,292 crore Rs in four tranches in series I. Data shows no. of applications for the fourth tranche increased to 1.95 lakh from 62,169 in the first tranche. Despite these advantages, investors must note that liquidity in secondary market for sovereign gold bonds is yet to be seen.

The table intends to illustrate various aspects on the investment instruments.


Investing in corporate bonds – A good debt investment option available for Indian investors

Debt Secondary market remains an unexplored category for Indian investors, though it is very popular globally. This post attempts to highlight few basics about bond investments
Fixed income like #Bonds, #NCDs remains least talked about subject, amongst the indian individual investors. Investors can invest in the primary market and stay put till maturity, as well as trade like equity/ shares. Infact, news reports indicates, bonds have yielded higher return compare to #Nifty or sensex in last one year.  There are two types of bonds traded in the debt market, Government securities (G-sec) and corporate bonds (Tax free bonds, NCD etc). G-Sec are considered to be the safest option with maturity ranging from 91 days (ultra short term) to 30 years (long term).
Corporate bonds are issued by banks, NBFC and corporates involve higher risks compared to G-secs, however they offer higher return comparatively.
When we talk about debt instruments (bonds, NCDs, CDs etc.) we come across terms like coupon rate, annual yield, yield to maturity etc. Let’s understand what is yield and how it is related to coupon rate and bond prices. Yield is annual return on the investment indicating in percentage term.

Analysing Bond investments in two scenarios – 1. Primary market 2. Secondary market. 

Primary market clearly defines that investors enter when the issue opens by the corporate.
For Example – In Primary market, a bond issued with face value – 100, Coupon rate 10%, minimum investment of 10 bonds, chosing annual payout option, Tenor 10 Years . Here the market value of the bonds will remain at Rs. 100 till the maturity. The yield to maturity(YTM) will be 10% = coupon rate since market value is the same as face value. Final payout will be bond price + interest accrued.

Secondary market –  Apart from the new bond issues, there are existing bonds in the market with higher yield, which investors can look at, but one need to understand that the two markets work differently and yield may vary significantly.The secondary market signifies trading in the already listed bonds.
Yield to maturity for secondary market investors – Case 1 – Bond traded at discount
Once the bond is listed on the exchanges, the bond prices fluctuate depending on the asking prices and volumes on the said trading day. The asking price of a bond move based on demand, supply and interest rate cycle. However, future payouts are pre-determined. Suppose, a bond is issued at a face value of Rs.100/-, with a coupon rate of 10% yearly, somebody invests Rs. 10,000 in the issue, the yearly interest payout remains at Rs. 1000 for the rest of the tenure. Incase, the bond prices fall to Rs. 90, still the coupon payout will be Rs. 10. So, now the same bond will be available at 9000 Rs. And, will still be able to fetch annual return of Rs. 1000, as the coupon payments on the bonds remain the same, so the annual return (or annual yield) is 11.1%.
In this scenario, the current bond price<issue price. Hence, it can be called as “discount”. One, who is investing in this situation, will get higher coupon pay out, i.e. higher yield. It may happen in the higher interest rate cycle, (the interest rate moves upward).   

Yield to maturity for secondary market investors – Case 2 – Bond traded at premium
In exactly opposite scenario, if the interest rates fall post the bond issue, the interest of the buyers increases the exiting bonds available in the secondary market, as they offer higher coupon rate, however, the buyer may need to pay premium as the askprice of the existing bonds with higher coupon rate move upwards due to increased demand. Now, if the bond price increases to Rs. 110, for 10,000 investment, coupon payout remains at 1000, and on the current NAV, the value of the investment will be 100*110 = 11000. This is a win-win situation for the primary market investor. However, in the secondary market, the coupon pay-out remains at Rs. 1000, against the bond price of Rs. 110. Hence the new investor is getting 9.09% interest pay-out, lesser than the coupon offered in the issue. If current bond price> issue price, it is said the bonds are sold at premium
Incase, there is no change in the ask price than the issue price, it is known as at par value(face value).

In the secondary market, yield-to-maturity includes coupon payment and the additional gain (bought at discount) or loss (if bought at a premium).

The points to be noted –
1. During the rising interest rate environment, investors can take advantage of the discount on the bond price, and enjoy the high yield as the coupon payout (interest payment) remains the same on lower cost of investment.
2. During the falling interest rate regime, the early investors can look at entering existing bonds with high yield option to capture a good yield, it may attract premium.
3. The liquidity in the instrument in the secondary market plays an important role. Size of the issue, investor interest, maturity date etc plays important role in the volumes. If the volumes are not adequate, one may need to wait or pay a premium.   
4. In secondary market, the bonds carry risks on interest rate,liquidity, credit and market risks
For trading in bond market you need to have a demat account. Please contact your share broker.  
You may check Investing answers YTM calculator to find approximate yield to maturity when you buy on secondary market.

DHFL NCDs issue – should or shouldn’t buy – NCD review

View: Neutral NCD issue review
DHFL NCD Issue opens on Aug 3, 2016, closes on August 16, 2016
Should or should not buy? What to look at? Is it safe? Will it give high returns? What are the risk involved?
About the company – #DHFL, is a deposit-taking housing finance company registered with the NHB and focused on providing financing products for the #LMI (Lower Middle Income) segment in India primarily in Tier II and Tier III cities and towns since 1984. They are known for providing secured finance primarily to individuals, partnership firms and companies for the purchase, self-construction, improvement and extension of homes, new and resalable flats, commercial properties and land. They also provide certain categories of non-housing loans including loans for commercial property, medical equipment, and for plant and machinery.

About the issue

DHFL, NCD issue opens on August 3, 2016, a public issue of secured redeemable #Non-Convertible Debentures (“NCD”) of face value of Rs. 1,000 each aggregating up to Rs. 4,000 crore. The Issue is scheduled to close on August 16, 2016, with an option of early closure or extension as decided by the Board of Directors of our Company (“Board”) or the Finance Committee.

The NCDs received the highest credit rating ‘CARE AAA (Triple A)’ by Credit Analysis and Research Limited (“CARE”) BWR AAA (Pronounced as BWR Triple A) by Brickwork Ratings India Private Limited (“Brickwork”). The rating of CARE AAA by CARE and BWR AAA, Outlook: Stable by Brickwork indicates that instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations signifying the instrument carries lowest credit risk.
·         The minimum application amount is Rs. 10,000 collectively across all options on NCDs and in multiples of One (1) NCD after the minimum application. Maximum limit of a retail investor is Rs. 10 lakh.
·         Allotment is on a first-come-first-serve basis (except on the date of oversubscription, if any, when all the investors applying on the said date will get allotment on a proportionate basis).
·         Investors have an option to apply for NCDs in dematerialized as well as physical form
·         Category IV Investors (Retail Individual Investors) are defined as Resident Indian individuals and HUFs allowing investment upto 10 lakh
·         Investors can apply through ASBA, the NCDs are available both in physical and Demat format
Issue Structure
The issue is divided into 10 series depending on the tenure of the series and coupon payment. And divided into 4 categories – category I, II, III, IV.
  •  Interest on Application Money is at 8.00% p.a. and Interest on Refunded Money is at 6.00% p.a
  • Tenure of the NCDs are 3, 5 and 10
  • Coupon payment options – monthly, quarterly and annually
  • The interest payout metho includes NEFT, RTGS, Direct debit
  • Floor rate on interest rate for all categories is 8.90% and cap on interest rate for all categories is 9.50%.
  • Series X is a Consumer Price Index (CPI) linked instrument (Floating Rate Instrument) has a tenor of 3 years and the Coupon Rate for Category I & II investors is currently 9.10% (Reference CPI + 4.08%); and that for Category III and Category IV investors is currently 9.20% (Reference CPI + 4.18%). 12 month average for the period before the record date (currently at 5.02%; Source http://mospi.nic.in.  

Allotment is first come first served basis
Issue size and allocation
QIB: Rs. 800 Crore
Corp: Rs. Rs. 800 Crore
HNI: Rs. 1200 crore
Individual: 1200 crore
Total : 4000 crore
Interest rate:
For individuals
9.20% p.a for 3 years
9.25% p.a for 5 years
9.30% p.a for 10 years
For Non-individual
9.10% p.a for 3 years
9.10% p.a for 5 years
9.10% p.a for 10 years
#NRI investors cannot invest in this issue
My Take – #NCDs are being offered by reputed housing finance player, having a minimum investment requirement of Rs. 10, 000. The NCDs are secured, backed by assets, which means incase of default/ non-payment, assets can be liquidated to repay the debts. Credit rating agencies CARE and BWR has awarded highest credit ratings, suggesting lowest risk involved.  So, safety score is high for the principle amount.
Now let us look at the interest rate and coupon payment scenario. The #coupon rate across segment is expected to be just above 1.5- 2 % from any bank FDs at this point of time. Though the dematerialised NCDs don’t attract TDS, the investment will taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor. So, with a high tax bracket investor (20-30%) won’t be benefited much, as the return will be almost similar to Bank FDs.
However, interest rate movement can be a game changer in this investment. Apart from the coupon payment, capital appreciation on principal is possible incase interest rates soften during the tenure of the NCDs. The interest rate and bond prices move in opposite direction and one can sell it at a profit, instead of holding on till maturity. The scenario exactly can become opposite in case of rising interest environment, the prices of the instrument may fall sometimes even below the face value in some rare cases. For the investors in lower tax bracket, instrument offers higher interest rate than bank with minimum risk, may also enjoy capital appreciation incase interest rates fall.

General Risks –
  •         #DHFL’s Business is particularly vulnerable to volatility in interest rates
  •     Any increase in the levels of non-performing assets in loan portfolio, for any reason whatsoever, would adversely affect the business, results of operations and financial condition
  •     Any downgrade in their credit ratings may increase interest rates for refinancing their outstanding debt, which would increase their financing costs, and adversely affect our future issuances of debt and our ability to borrow on a competitive basis.


What is NCD and what makes it so attractive as an investment instrument

What is NCD and what makes it so attractive

NCD is a fixed income instrument Apart from taking bank loans Corporates, NBFCs raise money through issuing debentures. It is a financial instrument issued by corporates to support their business needs. There are two type of debentures, convertible debentures and non-convertible debenture. Convertible debentures are unsecured bonds and can be converted into equities or stocks at a future date as specified by the issuer.

NCD is financial instrument used for taking loan from the financial market. It cannot be converted into equity shares of the issuer in a future date, hence it offers higher interest rate. The NCD offers atleast 1.5 – 2% higher interest than any fixed deposit by a reputed bank and company deposits. NCDs come in both secured and unsecure form, secured #NCDs are backed by assets. Unsecured NCDs entails higher risk.

Added Edge
1. What makes it more attractive is, in the falling interest regime, the bond prices may surge, hence the value of the funds.
2. No TDS deducted on the demat form of investment (physical form does)

Points for the new investors
1. Once you come to know about a new NCD offer, check with your stock broker for online application.
2. Like any other IPO, it has a NCD comes with opening and closing dates
3. NCD offers coupon rate. Coupon rate is the interest rate paid on a bond by its issuer for the term of the security. For example, if a NCD issue comes with a face value of Rs. 100 and coupon rate 10%, the interest earned will be Rs. 10 per annum. However, in the tenure if the NAV price falls or surge, it will have no impact on the interest pay out, it will continue as Rs. 10 per year throughout the tenure. Hence, coupon rate is fixed on the offer price and continue through maturity 
4. Check for the credit rating allotted by #ICRA, #CRISIL, #CARE (triple A rating Suggest good financial health of the issuer, double A may give higher coupon rate, triple A ensures safety of your capital)
5. NCDs are also traded on stock exchanges. Apart from the new offers, investors can also buy exiting NCDs through stock exchanges, however, one need to be double careful and seek guidance from financial planner.  
6. Interests are generally paid through direct credit, RTGS, ECS and NEFT mode. It may offer monthly/ quarterly/ annually/ cumulative options.
7. Tax – The investment is taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor.
8. This is as liquid as a bank fixed deposit. However, there is no penalty fee for pre-mature withdrawal of this investment
9. Additional Features – Some NCD public issues offer special rate of interest to Senior citizens or to shareholder.

Pros

1. It’s #liquidity is as good as any fixed deposit in bank, which has a specific tenure but can be withdrawn any time. However, FD may charge a penalty fee on interest accrued.. but incase of NCD, there is no penalty.
2. If it is compared with company fixed deposit, company deposits (a popular instrument in the senior citizen segment with 0.25- 0.50% extra interest)comes with various conditions for pre-mature withdrawal, for eg – lock-in periods, penalties etc.
3. NCDs come with Rating from #ICRA #CRISIL #IndiaRatings #CARE which gives a clarity to the investor on the risk involved, higher the rating, lower is the risk (AAA being the highest category, followed by AA, A, A-, BBB and so on)
4. Incase of bankruptcy, NCD holders get preference over shareholders

Cons
1. Incase interest rate increase, the value of the NCD may fall, sometimes even below the Face Value.

2. Though, the instrument can be traded on the exchanges, one may not find a buyer for NCDs if the trade volumes on bourses are low.

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