Personal Finance

Returns not attractive enough

Satya Sontanam | | Updated on: Aug 18, 2019

Given the enhanced risk perception of NBFCs, the returns are not commensurate with risks

Among the key deciding factors in any investment decision are the risks and the rewards of the instrument under consideration. On these parameters, the secon d tranche of non-convertible debentures (NCD) from Tata Capital Financial Services (TCFS) that is on offer now, can be given a miss. The company is registered as a deposit-accepting non-banking financial company (NBFC). Given the enhanced risk perception of NBFCs in recent times, the returns offered by the issue don’t seem commensurate.

About the issue

The NCD issue of TCFS (bonds with face value of ₹1,000 each) comes with options of three-, five-, eight- and 10-year tenures, offering interest rates of 8.45 per cent, 8.5 per cent, 8.65 per cent and 8.85 per cent per annum, respectively to the retail investors. The issue will be open till August 23 and the minimum deposit is ₹10,000 (10 NCDs), and in multiples of ₹1,000 thereafter. The interest amount will be paid out annually. Except the 10-year bonds that are unsecured in nature, the bonds in the other tenures are secured against assets. The issue has been given the highest AAA rating by CARE.

The NCDs will be listed both on the BSE and the NSE.

Low-key returns

Compared with other options in the market now at similar or lower risk, the interest rates on TCFS’s NCD issue don’t seem attractive.

First, the longer tenures (five, eight and 10 years) may involve loss of opportunity to re-invest at higher rates, if the interest rate cycle in the economy moves up in the interim period. So, let’s consider the three-year option — a reasonable window at the current juncture.

The three-year NCD option from TCFS offers interest rate of 8.45 per cent per annum, to be paid annually. This is lower compared with the rates on the other NCD issues open now (more than 9 per cent in the case of Shriram Transport Finance and more than 10 per cent for Indiabulls for similar tenures). But that’s understandable, given that the TCFS issue has a higher rating (AAA) compared with other issues that are rated AA and, hence, carry a relatively higher risk. That said, the returns on the TCFS issue fall short, compared with instruments that carry the same ratings. For instance, the AAA-rated corporate fixed deposits of Sundaram Finance, Mahindra Finance (Samruddhi Cumulative Scheme) and Shriram Transport Finance offer 8.66 per cent, 8.8 per cent and 9.4 per cent, respectively, for similar tenures.

Besides, bank deposits with insurance cover of up to ₹1 lakh for principal and interest also offer rates close to that of TCFS. For fixed deposits of similar tenures, some private sector banks offer up to 8 per cent. Small finance banks offer even higher rates of interest ranging from 8.3 to 9 per cent; they have limited branch presence though.

The TCFS issue is also not suitable for those who wish to reinvest the interest accrued till maturity, since interest will be paid out annually and the cumulative option is not available.

Published on August 18, 2019

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