There are two new offers in the fixed income market for retail investors. Shriram Transport Finance Co. Ltd is out with a public issue of non-convertible debentures (NCDs) across various tenures with 9.10-9.40% annualised return, while Reliance Nippon Life Asset Management Ltd has its new fund offer (NFO), Reliance Nivesh Lakshya Fund, a long-term fixed income investment option.
New NCD
NCDs offer a good solution to those looking for regular income. This one is offering a choice of three tenures—3, 5 and 10 years. There are three options for interest payment—monthly, annual and cumulative (see graph). The monthly option works if you are looking for regular income and the cumulative option (where interest accrued is aggregated and paid out at the end of the tenure) gives the most efficient return if you don’t require money in the interim. While the interest rate is higher than what most bank fixed deposits give, the interest will be taxable at your slab rate just like in FDs.
“The headline return at 9% plus is attractive. But on a post-tax basis, it works well only for those in the 10% tax bracket. If you are looking for diversification, tax efficiency (beyond 3 years holding) and liquidity debt mutual funds are better,” said Amol Joshi, founder PlanRupee Investment Services.
At 9.03% per annum, the post-tax earning for those in the highest tax bracket will be around 6.24%; for those in the 10% bracket, it will be around 8.10%. Avoid investing in the longer tenure NCD and if you fall in the 30%-plus tax slab.
New fund offer
It’s an open-ended fund where you can invest at all times. This scheme will invest in government securities with long maturity with the objective of giving long-term compounded returns. It is an actively managed but with a buy-and-hold strategy. The minimum duration of the scheme will be seven years.
“The strategy is a high duration product but does not depend on interest rate movements. We will invest in 25-30-year G-secs; incremental inflows too will be used to buy and hold the same. The end corpus for an investor will be influenced by how long they remain invested,” said Amit Tripathi, chief investment officer – fixed income, Reliance Nippon Life Asset Management.
Sovereign guaranteed G-Secs are perhaps the safest for conservative investors. For holding periods beyond three years, tax efficiency rises. But given the mutual fund format and daily reporting of per unit net asset values (NAV), in the initial years you are likely to see the impact of marked-to-market volatility in the NAV. “Return visibility increases over time as marked-to-market impact on NAV smoothens out with compounding of annual yield from the underlying security. The investment horizon should be at least 10 years,” said Tripathi.
However, interim volatility can cause anxiety. “This type of fund will help if you are sure to remain invested for at least 15-20 years. Investors need to be able to handle daily swings,” said Joshi.
It is a buy-and-hold investment, which if managed consistently can help build a good debt allocation for long-term goals. It has an exit load of 1% for redemptions before 36 months. It can add allocation to your long-term fixed income portfolio, with the caveat that daily volatility shouldn’t bother you.