Should you go for Muthoot Fincorp’s NCD issue offering up to 10.20% interest?

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Non-banking finance company (NBFC) Muthoot Fincorp Ltd on Wednesday launched an unsecured as well as the secured issue of non-convertible debentures (NCDs) with an aim to raise up to 400 crore. The issue, which will close on 29 April, is offering an effective yield in the range of 8.57-10.20%.

The base size of the issue is 200 crore with a green shoe option to raise it to 400 crore.

The issue has been rated A+ with a stable outlook by Crisil Ltd. According to the company, instruments with this rating are considered to have an adequate degree of safety regarding timely servicing of financial obligations.

As per experts, these ratings mean that the debentures carry low credit risk but are not as safe as AAA-rated instruments.

Moreover, a part of the issue has been secured against all loan receivables, both present and future, of the company.

The funds raised through the issue will be used for the purpose of working capital and general corporate purposes.

The NCD has a face value of 1,000 with a minimum application size of 10,000, and in multiples of one NCD, thereafter. Investors have nine investment options with monthly and on maturity redemption payments with an effective yield in the range of 8.57-10.20% per annum. Investors can lock in money for a period of 27, 38, 60, 72 and 87 months in these NCDs, which are proposed to be listed on BSE.

The secured portion of the issue will have an effective yield in the range of 8.57-9.10%, while the unsecured effective yield is from 9.92% to 10.20%. According to experts, unsecured NCDs are much riskier than the secured NCDs as the bonds are backed by the company’s assets.

Moreover, investors should not that an NCD issue offering higher returns will have a higher risk.

Nishith Baldevdas who doesn’t recommend NCDs to investors, said: “Even AAA-rated secured NCDs have faced problems in the past. Investors should only go for NCDs if they have a very high-risk appetite and have already arranged for their safety and liquidity buckets. Investors going for NCDs should first understand the risks. Moreover, senior citizens should ideally avoid them as they should only focus on safety and liquidity aspects,” said Baldevdas, founder of Shree Financial and a Sebi-registered investment adviser (RIA).

Investors must also note that redeeming NCDs before maturity might be a challenge, as the Indian debt market is not that deep. They must also be mindful of taxation, as interest earned on these instruments is taxed at your income tax slab rate.

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