The start of the financial year has seen a line-up of NCDs (non-convertible debentures) hitting the market. These NCDs are offering around 2% over the bank FD rate making them attractive on the return front. We spoke to a few advisors to understand if advisors should recommend NCDs. In addition, we will look at how NCDs stack up to FMPs (fixed maturity plans).
Bharat Bagla, Bees Network, Kolkata feels that both FMPs and NCDs are suitable for fixed income investors who have low risk appetite. The main positives for NCDs according to Bharat are:
- Cash flow: The interest payout option offers regular cash flow to investors unlike FMPs, which offer payout only at maturity.
- Clarity about returns: The rate of interest is pre-defined for an NCD, unlike FMPs where the indicative yield is determined after portfolio construction.
- Liquidity: Though both NCD and FMP are listed on the stock exchange, NCDs tend to be more liquid compared to FMPs, which do not have an active secondary market.
- Ratings: With NCDs, you can choose to invest in only high quality NCDs while in the case of FMPs the portfolio rating profile is decided by the fund manager.
- Tax implication: NCDs held in demat form do not attract TDS on interest. Senior citizens with modest income can invest in NCDs and receive tax free interest.
Vinod Jain of Jain Investments, Mumbai feels that when it comes to debt investments, be it FMPs or NCDs, safety of capital is more important than the return on capital. Hence, he feels that advisors should only recommend high rated NCDs. Even in the case of FMPs, advisors need to analyse track record of the fund house and study their previous investment portfolios before recommending an FMP to clients.
Akshay Tiwari, Next Portfolio, Delhi feels that advisors should diversify their business by offering multiple products like NCDs along with FMPs. Typically, fixed income clients do not want high credit risk in their portfolio. Advisors can mitigate credit risk for their clients by recommending well-researched high-rated NCDs. However, advisors do not have such an option in case of FMPs where the portfolio can be a mix of high rated and risky investments he said quoting the recent FMP scare. Moreover, NCDs offer easier liquidity and regular interest income to investors unlike FMPs, which is another plus according to him.
Rajkot IFA Ravi Kalariya feels that NCDs triumph over FMPs in terms of liquidity and giving advisors the option to recommend only high quality issues. FMPs on the other hand offer benefit of professional management, research driven investments and risk mitigation through portfolio diversification.
Here are some other features of an NCD
- They mandatorily carry ratings from two different agencies
- Company related risks are mentioned in the prospectus
- Both secured and unsecured NCDs are available for investment
- NCDs offer fixed return with fixed tenure. In case of delay in payment of interests or principal, the company is classified as defaulters
- NCDs are eligible for long term capital gains tax after 1 year
- Investors can only purchase it through an advisor
Overall, NCDs compare well with FMPs. It is upon the advisor to ascertain a client’s risk appetite and liquidity needs and recommend investment options accordingly.
