Debt Investment : Part 1

Debt Investment : Part 1

We have discussed about equity as asset class in details our previous blogs. Now we are moving towards debt investment. Debt means loan. It means borrower have obligation to return money with interest to lenders.

In debt market investor invest money as a loan with issuer at a predefined coupon rate. Issuer may be any institution, banks, government, public sector companies, private companies. Coupon rate is nothing but interest rate which issuer pays to the investors at predefined regular interval.

Advantage and disadvantage of debt investment:

• It is less volatile than equity market. Conservative investors invest in debt market for safety of principal amount. They feel more comfortable in debt compare with equity investment.

• In debt investment, investors get regular cash flow in the form of coupon which is predefined. Investors get coupon income at regular interval.

• It works on interest rate moment. The bond prices increase when interest rate goes down and investor can take advantage of capital appreciation.

• The return on debt investment is fixed. That is the reason investors feel more comfortable in this investment.

• However, it has less risk than equity but it gives low return and merely beat inflation. In majority of debt investment post tax return even not able to beat inflation.

• It is low risk and low return investment and retail investor cannot direct participate in the debt market. They participate in the debt market through bonds, debt mutual fund and PPF etc. Right price discovery is also problem in debt market.

• Debt investment has interest rate risk and credit risk also. We will discuss further about these risks in our further blogs.

We will discuss in our next blog about the various available debt avenues and its suitability to the investors. If you want more information regarding debt investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Public Provident Fund : A summarized view

Public provident fund (PPF) is one of the best tax saving investment option under section 80C in the point of view safety. However, it does not guarantee to build a great wealth but it offer a great sense of safety with capital appreciation. Many of investors often confused between EPF(Employee Provident Fund) and PPF. Today, we will understand about PPF investment. The main feature of PPF as given below:

• ·         Only Indian citizen can open PPF account. No NRI and foreigners are allowed to open this account. If anyone get NRI status after opening the PPF account then he/she can be continue with it. 

• ·         It can be opened in the name of single name. Joint names are not allowed. Parent can open this account in the name of minor but the total tax exempt limit would be Rs 1 lakh only including parent’s investment.
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•  ·         The minimum amount needed Rs 500 every year to maintain it. The investor can deposit maximum 12 times in a financial year.

• ·         The return is flexible but sure and it decided by RBI every year. For 2013-14 the rate of return is 8.7% per annum. It is the safest investment backed by government of India. It cannot be attached under any court order for debt recovery.

• ·         You get tax benefit under section 80C on invested amount subject to upper limit Rs 1 lakh. The return is also tax free.
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• ·         It has 15 year lock-in period. After completion of 15 year one can extend it by 5 year block period. It allowed partial withdrawal facility after completion of 5 year after opening the account. The loan facility is also available in PPF.

• ·         The PPF account can be opened in post office, SBI branches. Now some private banks like ICICI bank are also offering such services. If you move your residence from one place to another, in that case you can easily shift it to nearest bank or post office.
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It is great tool to accumulate wealth in long term with higher degree of safety. For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Inflation Index Bond

Deutsche Mutual Fund was the first fund house to launch Inflation Indexed Bond Fund in January. After Deutsche, Axis and SBI are also planning to launch Inflation Indexed Bond Funds. Both Axis and SBI have filed offer documents with SEBI to launch Inflation Index Funds. Distributors feel that more fund houses may join the race to launch such funds. Benchmarked against CRISIL Liquid Fund Index, these funds aim to provide investors inflation adjusted returns. These funds invest a minimum of 70% of assets in Inflation Index instruments and a maximum of 30% in debt and money market instruments. Investors can invest in a minimum of Rs. 5000 in these funds. Deutsche was the first fund house to launch Inflation Indexed Bond Fund in January 2014. The fund collected Rs. 27 crore during its NFO.  As the name suggests, the scheme invests a minimum of 70% of its corpus in Inflation Indexed Bonds (IIB) issued by the government. IIB have their coupon and principal linked to inflation as measured by Wholesale Price Index (WPI) and a tenor of 10 years. Such instruments are being issued every month since June 2013. We spoke to some experts to find out if these funds make good investment opportunity. Suresh Sadagopan of Ladder7 Financial Advisories feels that Inflation Index Bond Funds are more tax efficient. “If you hold it more than one year then the returns will be treated as capital gains through the mutual fund route. If you invest directly in Inflation bonds then then you have to pay tax as per your income tax slab. So investing through mutual fund route is more tax efficient. You also get liquidity.” Nikhil Kothari of Etica Wealth Management says that investors who are purely looking to hedge against inflation can invest in these bonds. “Inflation Index bonds are available at discount - Rs. 82 currently. So there is room for getting capital gains. If more fund houses come up with such funds then there is a possibility that the demand for these bonds will go up which will lead to increase in the price of the bond. Investors falling in the 30% tax bracket with a 3-4 year time horizon can consider investing in these funds. If you compare these bonds to tax-free bonds, tax-free bonds can provide capital appreciation when interest rates fall which is not the case with Inflation Index Bond funds. The returns in tax-free bonds are fixed whereas the returns from these funds can vary depending on the rate of inflation.” Hemant Rustagi of Wise Invest Advisors says “Inflation Index funds have not caught the fancy of investors yet. The funds may beat inflation at a gross level but after paying expense ratio and tax the returns would be less. The returns could go down as inflation falls. Investing through mutual fund route is better because you don’t have to lock in money for ten years. Tax free bonds may look attractive but there is no compounding benefit.  Vishal Dhawan of Plan Ahead Wealth Advisors feels that inflation index funds can offer better returns as compared to tax-free bonds if interest rates continue to go up. “These funds are being ignored because of the high yield offered by tax-free bonds. Inflation Index Fund is a much more tax efficient way of investing in these bonds than investing directly. For more detail and any other query related investment, you can contact me through my email. Warm regards, Arvind Trivedi Certified Financial Planner arvind.trivedi79@gmail.com www.artofinvest.com www.arvindtrivedicfp.blogspot.in (The above article from cafemutual website)

HUDCO Tax Free Bond - Opening on 17 September

HOUSING AND URBAN DEVELOPMENT CORPORATION LIMITED

After the REC tax-free bonds, the next company to come up with such an issue is Housing and Urban Development Corporation Limited (HUDCO). The company will be launching its issue from the coming Tuesday, September 17.

As compared to REC’s 8.26% (10Y), 8.71% (15Y) and 8.62% (20Y), HUDCO is offering 8.39%, 8.76% and 8.74% rate of interest for the respective tenors.

Though the interest will be paid annually but the date is not available. No prospectus available on company’s website.

HUDCO is raising total Rs. 5,000 crore from this tax-free bonds issue in this financial year, out of which it has already raised Rs. 190.80 crore through private placement. So, now it plans to raise the remaining Rs. 4,809.20 crore through this public issue, including the green-shoe option of Rs. 4,059.20 crore. The base issue size is Rs. 750 crore.

The official closing date of the issue is October 14 and the company may extend or preclose the issue, depending on the investors’ response to the issue.

The main features of REC issue as maintained below:

Rating of the issue - CARE and India Ratings have assigned a rating of ‘AA+’ to this issue, which is also ‘Secured’ in nature. HUDCO is wholly-

owned by the government of India, so the investors’ investment is quite safe.

Listing - HUDCO will get these bonds listed only on the Bombay Stock Exchange (BSE). The allotment and the listing will happen within 12 working days from the closing date of the issue. Investors can apply for these bonds either in physical form or in demat form, as per their comfort and requirement.

Interest on Application Money & Refund - The investors will get interest on their application money also, from the date of investment till the deemed date of allotment, at the same rate of interest as the applicable coupon rate is. Unlike REC issue which is to pay 5% p.a. interest on the refund money, HUDCO will pay the applicable coupon rate.

Categories of Investors & Basis of Allotment - The investors again have been classified in the following four categories and each category will have certain percentage of the issue reserved for the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved

Category III – High Net Worth Individuals including HUFs, NRIs & QFIs – 30% of the issue is reserved

Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue is reserved

QIBs portion had 20% of the issue reserved in the REC issue and after observing their response in that issue, their reserved portion has been reduced to 10% in this issue. Category III HNI investors will get this 10% share of the pie. NRIs are eligible to invest in this issue as well, on a repatriation basis as well as on non-repatriation basis. Qualified Foreign Investors (QFIs) are also eligible.

Minimum & Maximum Investment - There is no change in the minimum investment requirement of Rs. 5,000 i.e. at least 5 bonds of Rs. 1,000 face value each. Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.

Interest rates of this issue look very attractive for the investor. I think it is good investment option for the investor of any tax bracket. Investors must go with it for safe and reasonable return.

For more detail about any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi, Certified Financial Planner

Arvind.trivedi79@gmail.com