Golden tips for investors in lower tax brackets

Investors in the 10% and 20% slabs can get better post-tax returns compared to a bank fixed deposit

Most small saving schemes have seen a downward revision in interest rates recently. Bank and post office fixed deposits are now in the range of 7.5-8 per cent and high-rated company deposits return 8.4 per cent.

In this scenario, Mahindra Finance has come up with a non-convertible debenture (NCD) issue that can fetch investors returns of nine per cent annually.

In the individual category, those investing up to Rs 500,000 are categorised as retail investors and if a person invests above that amount, he will be considered a high net worth individual (HNI).

For retail investors, the coupon rate for debentures are 8.7 per cent for an investment tenure of five-and-a-half years, 8.8 per cent for seven years, and nine per cent for 10 years. For HNIs, the rates are slightly lower – between 26 and 28 basis points depending on the investment period.

Rated as AAA by credit rating agencies, the issue will open on May 25 and close on June 10. The allotment, however, will be on a first-come, first-served basis. This means, if the debentures are subscribed early, the company will close the issue. These will also be listed on exchanges for trading in case investors wish to liquidate them.

“We are specifically targeting small investors for this issue, who can get better post-tax returns from this. We do have company deposits with tenures between one and five years that have interest rates of 8.45 per cent. But, these NCDs will be for those who wish to lock-in their investments for a longer tenure,” says Dinesh Prajapati, vice-president (treasury and corporate affairs) at Mahindra Finance.

Investment advisors say the NCD issue makes sense for retail investors in the 10 per cent and 20 per cent tax brackets. “We think these are apt for small investors who are not in the highest tax bracket. The post-tax returns are attractive for such individuals,” says Anil Chopra, group CEO and director, Bajaj Capital.

For those in the lowest tax bracket, these NCDs will fetch post-tax returns of 8 per cent if they opt for the 10-year tenure, while those in the 20 per cent tax slab can get seven per cent.

As for the risks, debentures are riskier than bank or post office deposits as they are unsecured loans, and that’s the reason they fetch higher returns. Say, if a company is declared insolvent, it will first have to cater to the government liabilities, then secured debtors such as banks, and then come unsecured lenders (debenture investors).

“But, the issue has the highest credit rating of AAA, which should give investors comfort,” says Chopra. Financial planners say although it has high credit ratings, investors should restrict their investments to 10 per cent of the overall portfolio.

If you are an investor who doesn’t have a demat account and still wish to opt for this, it would be better to look at corporate debt funds. This would also give indexation benefit, if you redeem investments after three years, says Malhar Majumder, a Kolkata-based certified financial planner.

“Demat account also has a maintenance fee every year. If an investor doesn’t use the demat account actively, the 1.5 per cent premium that the NCD fetches over a bank fixed deposit will be nullified due to the maintenance fee,” says Majumder.

Illustration: Uttam Ghosh/Rediff.com