Reliance Home Finance NCD issue, opens on Dec22, to invest or not?

#Reliance Home Finance, a fully owned subsidiary of #Reliance capital is set to make its maiden offer of secured and unsecured debentures on Dec 22, 2016.  
Year 2016 has seen an huge upsurge in Debenture issues by corporates, which were lapped up by investors. Following demonetisation spree and government’s endeavour to bringing down interest rate, corporate bonds appear to be a lcurative option . While lower interest rate should mean a positive move for the over all economy in the long run, the fixed income category is expected to see low return.
My take – 
The company has been growing consistently over last 5 years and has ability to pay the interest on the loan. However, the business is particularly interest rate sensitive and dependent on the growth of housing sector. 
NCD offers higher return, it comes with a higher risk. The secured NCD didn’t recieve the highest credit rating. Unsecured NCD, by nature is not backed by any security or assey making it a high risk investment. Conservative investor should avoid the unsecured NCD completely.
The retail investor can however look at some exposure in secured NCD category.

What is NCD and what makes it so attractive 
NCD is a fixed income instrument. Apart from taking bank loans, Corporates and 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. The low credit score of instrument indocates lower epayment of interest and the actual amount capacity of the borrower.
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. 
#reliance not #mymoneystreets

Fixed Income funds should be part of your portfolio

Economic Times reported today, that fixed income schemes losing sheen, find here how quietly a category “credit opportunities fund” is replacing the other debt funds as a investment option and debt mutual fund schemes remains attractive. We will discuss the topic in this post.

As usual, once the redemption pressure comes, suddenly a hot cake fund/ category becomes stale and out dated, same thing is happening with the fixed income fund category. Before making these odd judgments with half knowledge, we must look at what prompted the outflow, take away and the opportunities ahead.

Key take away
1. Unlike equity mutual funds, where we talk about SIP and staying invested for a long term, debt funds/fixed income funds considered for short -medium term and the funds see an upsurge in returns in the falling interest rate scenario.

2.Series of rate cuts by #RBI over last 2 years, the long term debt funds, medium term short term debt funds saw big upswing, giving investors handsome returns, and the chances for further rate cuts may not be aggressive as last few quarters hence it’s wise to book profits. And wise investors did so.

3. There is no panic situation in the debt fund category just because guilt funds, long term debt funds saw redemption. Investors are parking their money in credit opportunities fund (category – you can find in moneycontrol. Mutual funds section)

What is credit opportunities funds? Why should I invest? 

Credit opportunities fund is a category within the fixed income funds, investing in high credit quality corporate bonds by mostly non financial companies which offer higher returns compared to the g-sec, tax free bonds, government entities.
A good mutual fund company with a strong compliance team would invest in companies with high credit rating papers ntssuch as AAA or AA, will ensure asset backing for the debt. These funds also come in brackets of short term, long term category depending on the tenor of the debt investments,there are about 57 credit opportunities funds in the list however with a basic research would easily guide is on which tenor funds we should look at this point in time.

Mutual funds companies like ICICI PRU, Franklin Templeton, DSP BR are my personal favorites because of their meticulous processes. Don’t go by past returns of the funds, higher returns could also mean higher risks fund manager might have taken deviating from the mandate and could lead to extreme volatility in returns.

By no mean I am saying put all your cash in this instrument, every instrument comes with its own set of risks, so do corporate debts. These debts run higher credit risk, market risk and liquidity risk. All I am saying is debt funds are not a high and dry category and investors can look at allocating some portion of their investments in these funds to see some upside compared to bank FDs.

Check the list of funds for reference-

http://googleweblight.com/?lite_url=http://www.moneycontrol.com/mutual-funds/performance-tracker/returns/credit-opportunities-funds.html&ei=3r0p83CD&lc=en-IN&s=1&m=970&host=www.google.co.in&ts=1476723583&sig=AF9NedkoAQaVyGxfhovCj-LhqrxO8Mscbg

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.


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