Thursday, August 18, 2011

[www.keralites.net] Risk and Return evaluation of Muthoot & Manappuam NCDs

 

Presently most of the banks are offering interest rates in the range of 9.50% to 11.00%, then why you want to risk your money?  Please read the full articles to get an answer to this question.
What is a Non-Convertible Debenture?
An NCD  (Non-Convertable Debenture) is a type of loan issued by a company that cannot be converted into stock and usually carries a higher interest rate than a convertible debenture
 
Public Issue of Non-Convertible Debentures of Manappurm Finance and Muthoot Finance(from 23rd August) are presently available in the market for subscription.
Manappuram Finance
Muthoot Finance
Issue Open from 18/08/2011 05/09/2011
Issue Open from23/08/2011 to 05/09/2011
Credit Ratings CARE AA, BWR  AA
CIRISIL  AA (Stable),  ICRA  AA (Stable)
Nature of Business Finance Company (NBFC)
Finance Company (NBFC)
Main Activity Gold Financing
Gold Financing
Tradable Bonds issued in demat forms listed on BSE and NSE
Tradable Bonds issued in demat forms listed on BSE and NSE
Face Value of NCD Rs. 1,000.00
Face Value of NCD Rs. 1,000.00
Minimum investment Rs. 5,000 and multiples of Rs. 1000
Minimum investment Rs. 5,000 and multiples of Rs. 1000
Period of investments 400 days and 24 months
Tenor 24/36/60 months
Tax deduction from interest above Rs. 2,500.00
Tax Deduction from interest payment Rs. 2,500.00
Annual Interest    12.00%
Annual Interest 12.00%
 
Normally the NCDs issued by Non-Banking Finance Companies are risky even if they have good credit ratings from the well-known Credit Rating Agencies.   Both NCDs presently having � ratings that shows this particular instrument is stable as of the date  and this rating may change in the future depending on the other criteria and financial performance of the issuing company.  These types of rating just give an idea or indication of the financial status or security of that instrument for the time being, this rating may change at any time in the future.    Also, I am observed that, the main activities of these two companies are providing gold loans especially Manappuram Finance.  All their future activities, profitability, safety of your deposit etc are purely depending upon the up and downs of gold prices.  Now a days the gold prices are showing the tendency of moving upward, due to various national/global factors and people presently believe that, the gold is a safe investment and this yellow metal will guard their wealth and also it is believed that to a certain extent that this is a hedge against the rising inflation.  Everybody knows the gold has got only fancy value and industrial use of this metal is absolutely zero. However, there is every possibility of a correction in the gold prices in the medium to long terms.  Nobody can correctly predict, what will happen in the future, because there are lot of uncertainties.
Presently most of the banks are offering interest rates in the range of 9.50% to 11.00%, why you want to risk your money for an extra 1% interest more over the tax will be deducted at source, if the interest payment for a particular financial year is above Rs. 2,500.00 ( in case of bank deposits this limit is Rs. 10,000.00),you can avoid the deduction of tax by way of submitting Form 15C.  Most of the Urban co-operative banks are offering good interest rates and also I believe that, there is no tax deduction at sources.  As we are all aware the inflation rates in India is increasing day by day, even though Government is taking all possible measures to prevent this, but all the effort taken by Govt and RBI does not given any good result.  So there is a possibility of further increases in the Bank Repo/Reverse Repo Rates (the reverse can also happen).  Naturally once RBI increases the Repo/Reverse Repo Rates, correspondingly the bank deposit/ loan interest rates will also go up.   If you block your money for 3-5 years, you will not be able to break your deposits and book new deposits at higher rates. However, there is adequate liquidity in the in bank fixed deposits;   you can break your deposits at any time by way of paying small percentage penal charges, that comfort will not be evadible in the NCD deposits.    There are so many instances of default of interest and principal repayments, even well established and  well-known companies, 3-5 years period is a long terms anything can happen during these periods, mostly those who are operating in the banking and finance sector.  Still there is lot of uncertainties in the national and global levels. Both NCDs are listed on the stock market , so you need a demat account to subscribe for this NCDs.  For small investors/senior citizens this is an extra work and inconvenience, moreover they need to pay demat account opening charges and yearly maintenance fees.
Here, I am not judging these NCDs are good or bad investment. It's up to you to decide whether to subscribe for this NCDs. it is recommend parking risky portion of your portfolios in these types of NCDs based on your tax status and risk appetite.   These deposits carry higher risk than bank deposits and may not be meant for all investors.  As discussed earlier the rising interest rate regime, getting out of bank deposits may be easier than liquidating your NCD investment. NCDs are listed on stock exchange and may have to be sold at a discount and most of the time few people are trading on these instruments, hence the liquidity is very poor.  If you have surplus money and are willing to take a little more risk for that additional one per cent return, you can opt this investment avenue, once you invested, please try to hold this deposit till maturity.
 
Best Regards
Prakash Nair

www.keralites.net   

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