Bank deposits, even if you keep them for a period of 5 years is fetching only an interest rate of 5.5% in the larger banks. If you are in the highest tax bracket, your returns are very miniscule. It's time to look at various other debt options, including Non Convertible Debentures.
Where can NCDs be bought and how secure are they?
Non Convertible Debentures can be bought from the exchanges and if you buy them at the right prices, you can most certainly make more returns than bank deposits.
Let's see some of the NCDs from a selective list that is prepared and than work out the returns.
|Name||Interest rate||Maturity date||CMP||Face value|
|Shriram Transport N2||9.50%||2023-02-01||1050||1000|
|Edelweiss Housing N5||9.57%||2026-07-01||954||1000|
NCDs can be either secure or unsecure. Most of the NCDs that were issued earlier were secured and all of the above NCDs are rated either AAA or AA.
Understanding with an example
Let's understand with an example. Let's say that you buy the Shriram Transport NCDs with a face value of Rs 1000 for Rs 1050. If you were to spend about Rs 1 lakh, you receive 95 NCDS. On these 95 Ncds, the interest received every year would be Rs 8883, taking the yield to around 8.88%.
However, one has to take the loss into account, because you would receive only Rs 1,000 in Feb 2023 and you have paid Rs 1050. If you even work that out, the yield still works to around 6 to 7%.
If you do a research on all listed NCDS and there are plenty of them, you would realize that you can get vary good yields. The key here is that you need to pick the NCDs at the right price. If you are not buying at the current price, your yield is likely to be terrible.
Other details about NCDs
Non Convertible Debentures are listed on the stock exchanges and hence can be bought and sold there. We would advise to buy in smaller quantities as NCDs are not very liquid. Another advise would be to buy and hold till maturity. Generally, buy for a shorter duration of around 3 years and since you can sell them, it is a good option.
The interest earned is fully taxable, though there is no TDS that is deducted on the NCDs. This means that you need to add the interest income to the total income and file returns accordingly. Like NCDs there are tax free bonds also that can be bought in a similar manner, though there needs to be adequate research that has to be done before buying. The key here is to buy at the right price, so your yields remain high.
About the author
Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds and tax planning.