Debt Fund : Interest rate movement impact

Debt Mutual Fund: Interest rate effect

In India, the reach and awareness of mutual fund is still very low. People do not understand the difference between equity and debt asset class. Investors often consider all type of mutual fund in the same way. Today we will discuss about the impact of interest rate movement on debt mutual fund.

In debt mutual fund, we can divide it into three broad categories liquid fund, FMP and Income fund. Liquid fund has very low volatility and government bonds are very high volatile product in short term. On the basis of historical data of interest rate movement and debt fund return we have arrived on some facts.

Whenever the expectation of interest rate is going towards up then investor should be defensive and should consider liquid fund or FMP fund. The difference between liquid and FMP funds is nothing but the time period. Liquid fund is suitable for short term investment like 1 or 2 months. FMP is for the fixed lock in period investment and do not get affected from interest rate movement at the time of maturity. The only risk in the FMP is opportunity loss if any arises during the investment period.

During the falling interest rate scenario, long term bond investors get benefit. In longer maturity bond portfolio, one term called modified duration play vital role for return generation. For example, two long term duration funds have modified durations 4 year and 7 year. If interest rate moves down 1% then 4 year’s modified duration fund would generate 4% additional return whereas 7 year’s modified duration fund generate 7% additional return. But unfortunately if interest rate goes up 1% then these funds generates negative return according to the modified duration. Exposure in long term bond fund should be taken according to the risk appetite of investors.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Shriram Transport Finance Company Limited NCD issue

Today Shriram Transport Finance Company Limited (STFCL) have  launched  its public issue of non-convertible debentures (NCDs). The current issue will get closed in a couple of weeks time on October 21st, if it does not get preclosed this time again or extended by the company beyond this date. The company plans to raise Rs. 500 crore with this issue, including a green-shoe option of Rs. 250 crore.

This is the second such public issue of this financial year from STFC, as the company raised Rs. 750 crore from its first issue in July and the issue had got preclosed in just seven days time on July 24th.

Shriram Transport Finance offered 10.90% per annum for 36 months and 11.15% per annum for 60 months in its last issue to the individual investors. This time the rates are 35 basis points (or 0.35%) higher at 11.25% per annum for 36 months and 11.50% per annum for 60 months. The company did not offer 84 months option in its first issue. There is no monthly interest option this time.

Here you have the table having the details about the tenors and the interest

rate options with cumulative and non cumulative option.

As you can check from the table above, there is an additional incentive of 0.50% p.a. with 36 months option, 0.75% p.a. with 60 months option and 1% p.a. with 84 months option. Unlike tax-free bonds, this additional incentive is available to the individual investors irrespective of the size of their investment amount.

Categories of Investors - The investors have been classified in the following four categories and the individual investors fall in Category III as well as Category IV.

§  Category I – Institutional Investors

§  Category II – Non-Institutional Investors

§  Category III – High Net-Worth Individuals, including Hindu Undivided   Families (HUFs)

§  Category IV – Retail Individual Investors, including Hindu Undivided    Families (HUFs)

Non-Resident Indians (NRIs), foreign nationals and qualified foreign

investors (QFIs) among others are not eligible to invest in this issue.

Allocation Ratio - 50% of the issue is reserved for the Retail Individual Investors. The individual investor  can invest up to Rs. 5 lakh and 30% of the issue is reserved for the High Net-Worth Individual Investors. 10% of the issue is reserved for the Institutional Investors and the remaining 10% is for the Non-Institutional Investors (NIIs). The allotment will be made on a “first come first serve” basis.

Minimum Investment - The company has decided to keep the minimum investment requirement is  Rs. 10,000 again The face value of bond is  Rs. 1,000 each.

Listing - STFC will get these bonds listed on the National Stock Exchange (NSE) as well as the Bombay Stock Exchange (BSE). Investors can apply for these bonds either in physical form or in demat form. The company will get the NCDs allotted and listed within 9 working days from the date of closure of the issue.

Rating & Nature of the NCDs - CRISIL has rated these NCDs as ‘AA/Stable’ and CARE has assigned a rating of ‘AA+’ to this issue. Moreover, these NCDs are ‘Secured’ by a first charge on an identified immovable property and specified future receivables of the company.

Taxability & TDS - The interest earned on these NCDs will be taxable as per the tax slab of the investors. TDS will be applicable if the NCDs are taken in the physical form and the interest amount exceeds Rs. 5,000 in a financial year. But, if you take these NCDs in your demat account, the company will not deduct any TDS from the interest income.

Interest on Application Money & Refund - Investors will get interest on their application money @ 9% p.a., from the date of investment till the deemed date of allotment, and @ 4% p.a. on the amount liable to be refunded.

Interest Payment Date & Record Date - STFC will make its first interest payment on April 1, 2014 and then on April 1st every year. The record date will be 15 days prior to every interest payment date.

IIFL NCDs Issue vs. STFC NCDs Issue vs. HUDCO Tax-Free Bonds

The business model of Shriram Transport Finance is good and its credit rating also suggests that.  If you want to go with this issue, prefer short term period instead of long term period.

The investors falling in the higher tax brackets should opt for tax-free bonds rather than these taxable NCDs. So, personally I would go for HUDCO tax-free bonds or the upcoming IIFCL tax-free bonds rather than these STFC NCDs.

If you don’t fall in any tax bracket or fall in 10% tax bracket then you can consider this issue.

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

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Confused between interest rate and effective yield..?

Confused between interest rate and effective yield..?

We often see the advertisement in daily newspaper, magazine about the fix deposit offered by financial institution like bank, NBFC or corporate. They all offer the attractive return on fix deposit and often used a famous term “annualized effective yield”. There are difference between interest rate of fix deposit and annualized effective yield. The investors often don’t able to differentiate these two terms. Effective yield always look attractive than rate of interest on FD. We will understand it through an example.

Let us say, one financial institution offer an interest rate of 10% quarterly compounded for 1 to 10 year. So if one invest Rs 1,00,000 in this fix deposit for 4 year. In the first year at 10% quarterly compounded interest, he will get total interest Rs 10,381. After 4 year he will get total maturity amount of Rs 1,48,450. It means he has earned total interest Rs 48,450. To know the annualized effective yield we will divide it by no. of year deposit.

                 48450/4 = 12112.5

Annualized Effective Yield = (12112.5/100000)*100 = 12.11%

 Now you can easily understand the difference between these two types of rate. It means interest earned is same but companies can show it in different style. To attract the clients and to edge over the competitor, often some financial institution emphasis on a higher yield figure than normal rate.

So next time, when you go for fix deposit , please ask your representative for both rates and according to that comparision with other available fix deposits in the market.

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

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Muthoot Finance NCD Details

Muthoot Finance Limited, a flagship company of the Muthoot group, is primarily into the gold financing business which constitutes 99% of its total advances. It is also the largest gold loan company in India.  Muthoot started its lending business in 2001 after getting RBI’s registration to function as an NBFC and currently it has a network of 3,780 branches all over India. The company till date has no major plans to diversify its business from gold loans to any other streams of financing. This issue will be the fourth issue from this company in just over one year’s time. Muthoot collected Rs. 1,413 crore through its previous three issues – Rs. 693 crore from Series I, Rs. 460 crore from Series II and Rs. 260 crore from Series III. The size of this NCD issue is Rs. 500 crore including a green-shoe option of Rs. 250 crore.

Muthoot reported revenues of Rs. 4,549 crore in FY12 as against Rs.2,316 crore in FY11, a jump of almost 96%. Net profit of the company increased by a massive 81% from 494 crore in FY11 to 892 crore in FY12.  Gross NPAs and Net NPAs of the company stood at 0.56% and 0.57% respectively as on March 31, 2012 as against 0.29% and 0.33% respectively as on March 31, 2011.

Again, NRIs and foreign nationals among others are not eligible to invest in this issue. The allotment will be made on a “first-come-first-served” basis. These bonds will also list on both the stock exchanges – NSE and BSE. Investors will have the option to apply these bonds in physical form also except the “Option V” bonds which are available only in the  demat  mode. The detail as given below

Issue of Muthoot Finance Secured Non-Convertible Debentures (NCDs)

Options	Particulars
Issuer	Muthoot Finance Limited
Issue period	17 September 2012 To 5 October 2012
Issue Size	Rs 500 Crores (Public issue of Rs 250 Crores with an option to retain over-subscription of Rs 250 Crores)
Basis of allocation	First come first serve basis
Listing	Proposed to be listed on BSE and NSE
Rating	ICRA AA-/Stable and CRISIL AA-/Stable
Face Value and Issue Price	Rs 1,000 per NCD (Trading Lot - 1 NCD and in multiples of 1 NCD)
Minimum Application	Rs 10,000 (10 NCDs) and in multiples of 1 NCD thereafter
Interest Payment Date	Annual Frequency - on 1st day after 31 March and Monthly Frequency - 1st day of next month.
Trading and Issuance	Both physical and dematerialised form (NCDs under Option V will be compulsorily allotted in dematerialised form.)
Interest Payable	Interest on application 11.50% p.a and Interest on refund 6.00% p.a. (Refer Terms and Conditions)
Who can apply: Institutional, Non Institutional, Indian Nationals Resident in India and HUF
Investor Category	I (Institutional)	II (Non Institutional and HNl)	III (Retail)
Issue allocation %	15%	35%	50%

Specific terms for each series of Bonds:

Series	I	II	III	IV	V
Frequency of Interest Payment	Annual	Annual	Monthly	Annual	Cumulative
Tenor (In months)	24	36	60	60	72
Coupon Rate (%) p.a	11.50%	11.75%	11.75%	12.00%	NA
Effective Yield (%) p.a	11.50%	11.75%	11.75%	12.00%	12.25%
Redemption Amount per NCD	Face value + interest				Rs. 2,000

View on this issue:

As the Reserve Bank of India (RBI) has become stricter with the gold financing norms. Competition from the banks and other gold financing companies has also increased. It is the most unattractive issue of this financial year.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com