Friday, September 6, 2013

Should You Invest in Muthoot Finance NCD?

Muthoot Finance's NCD is better suited for investors with high risk- appetite, who are looking for shorter tenures, and not falling within the highest tax bracket.

Muthoot Finance Ltd’s Non Convertible Debenture (NCD) Issue which is currently open for investment offers 11 options for investors.

Ten of them are secured options, ranging in maturity from as short as 400 days (around 13 months), to as long as 60 months.

The interest rates offered for these ten secured options vary between 11% to 12.55%. Other selectables include interest that is payable monthly, annually, or on completing the tenure.

The 11th and unsecured option has its maturity date at 72 months from the deemed date of allotment and the effective yield is 12.25 percent per annum.

These NCDs will be listed on exchanges post subscription, and might offer limited liquidity.

NBFCs like Muthoot Finance have been resorting to the NCD route due to two reasons. Firstly, banks, as per RBI directives, have been squeezing lending to them. Secondly, banks have been unwilling to lend at lower rates to these NBFCs.

Whether an ordinary investor should go for these NCDs solely depends on their risk appetite. Though Muthoot Finance has a stable track-record as far as NCDs goes, such instruments from other Indian corporates have shockingly failed in the past.

Investors can look at the rating offered by agencies like CRISIL to further ascertain risk. CRISIL and ICRA have both rated Muthoot Finance NCD at AA- with a negative outlook.

Investors who want a less riskier option can look at bonds issued by Rural Electrification Corporation, which is a PSU, that carries the safer AAA rating. It carries the additional benefit of being tax-free.

Gold loan companies like Muthoot Finance also has the additional risk emanating from gold price falling as well as regulatory tightening by RBI.
Comparing the yields of both, it is clear that Muthoot Finance NCD’s advantages are with shorter tenures, lower income tax brackets, and higher risk taking capabilities.

For highest income tax brackets and low risk appetites, the REC tax-free bonds are better, especially if a longer tenure is not an issue.

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