Fixed income investments as the name suggests provides the investor with a steady and guaranteed income stream. Currently in this category we have bank post office savings schemes, bank FDs, PPFs, NCDs & savings plans from insurance providers etc. We will be covering more on NCDs and savings plans in this blog.

NCD – Non convertible debentures

What are NCDs?

Let’s understand what are NCDs. NCDS – Non convertible debentures are essentially debt instruments. Companies issue NCDs to raise funds in the form of loans. NCDs generally carry a fixed interest rate (known as coupon). This is what will be paid to the purchaser (investor) on a fixed pre decided interval i.e. monthly, semi-annually, annually depending upon how the NCD is structured. The principal amount invested is paid back to the investor at the end of the NCD tenure.

How to invest?

Public Offer

Just like equity shares, NCDs are also offered for sale to the public through initial public offers. Advantage of investing at this stage is that you get complete flexibility to invest amount of your choice. Post this offer & listing, the lot sizes in the secondary market are generally larger & liquidity tighter.

Listed on the stock market

NCDs are listed on the stock market & can be directly purchased from the exchange. One needs the keep in mind that liquidity is not at par with the equity shares and hence choice & quantum may be restricted.

Over the counter deals

NCDs can also be bought over the counter thru secondary market dealers. Large dealers offer a list of NCDs available for purchase on a daily basis. Investors can approach them and get a customised list of NCDs.  Lot size is usually large.

What to check before investing in a NCD?

Two important things to check before investing in an NCD are:

Credit Rating of the NCD

Credit scoring scheme used to judge the quality and creditworthiness of a bond. The rating takes into consideration a bond issuer’s financial strength or its ability to pay a bond’s principal and interest in a timely fashion. Generally investors should stick to AAA credit score which is the highest credit rating offered to an instrument.

Yield to Maturity and Coupon

The rate at which a bond makes interest payments to the investor is commonly termed as the coupon rate. It represents the annual interest rate paid out by the bond with respect to its face value, and it is denoted as a percentage. Let’s take up an example to better understand the concept of coupon rates.

Assume that a company issues a bond with a face value of Rs. 10,000. The rate of interest on this bond is set at 10% per annum. Here, the 10% per annum is what is known as the coupon rate. So, when you invest Rs. 10,000 in the bond, you will receive Rs. 1,000 per annum as interest payments.

The primary difference between coupon rate and yield to maturity is that the coupon rate stays the same throughout the tenure of the bond. However, the yield to maturity undergoes a change depending on various factors such as the years remaining till maturity and the current price at which the bond is being traded. Let’s take a simple example:

For investors who purchase a bond directly from the company through a new offer with the intention of staying invested till the date of maturity, the coupon rate is what they should consider. While for bond traders, who buy and sell bonds in the secondary market, the yield to maturity is what they should consider.

Savings Schemes / Guaranteed Income Plans

Saving schemes or plans are an important part of financial planning and long-term financial stability. These plans are offered by insurance providers. Under such plans the insured usually pays premium for say 3/5/10 years and then receives fixed guaranteed tax free payouts either at the end of the policy term on a lumpsum basis or on a pre structured monthly/annual basis.

The key point to remember here is that these inflows are fixed, guaranteed & tax free. Another salient feature is that they offer complete flexibility in premium payment amount, terms as well as their payout structures. Some benefits of such plans are:

• Assured returns – Completely assured returns – you get what you see

• Flexibility in premium payments – Monthly/Quarterly/Annual/Single payment Options offered

• Multiple Payout options – You can structure to receive your pay-outs as per your choice – pay-outs can be received after N number of years, in lumpsum/monthly/annual format as per your choice.

• Tax free cash inflows – All inflows under these plans are completely tax free (except annuity plans used for retirement planning which are taxable)

• Life Long income options – Inflows in several plans can be structured to be received on a life long basis. Several plans also provide option for inflows to be received by the nominee post the death of the primary insured.

• Long term lock in of rates – with a tax adjusted IRR of ~ 7.5 to 8%, these are great to lock in your interest rates for a long period (including lifetime options). While FD rates today are in the range of 5.5 -6.5 %, we cannot predict their range for the future. Guaranteed plans however help you lock your return % for a long term.

While traditionally these plans have been used for retirement planning, it makes good financial sense to incorporate such plans in your financial planning structure early on. These plans can help you create a sound second income stream. They can also be structured to fund a specific goal like child’s education. Completely decoupled from the market volatility, they help you create a steady & assured income source.

The duration of your investment in a savings scheme would depend on the objective behind the investment – whether it is to fulfil long-term or short-term financial goals. Consider what you are investing for and how liquid or accessible you need your money before deciding on a short- or long-term investment. Establishing a timeline can be useful in this process. For example, a savings scheme to fund your child’s higher education, a dream trip to another country, or simply save up for retirement.

How to buy these plans?

While all the plans are available for purchase online from individual insurance companies as well as insurance aggregators, its best that you consult your financial advisor before buying any of these plans. The simple reason being – these plans are a long term commitment, better to have an expert evaluate them from all angles and ensure that it’s a best fit product for you.

So folks, go ahead and explore some fixed income options for your portfolio. For any advice and assistance get back to us at info@investopert.com 

Happy Investing & Happy Learning