Invest in Credit Risk Mutual Fund or not?

Muthoot Fincorp has announced the public issue of an unsecured as well as the secured issue of non-convertible debentures (NCDs) for up to Rs 400 crore with an effective yield in the range of 8.57-10.19%. The issue closes on April 29, 2021. Around 75% of the amount raised from the public issue will be used for the purpose of working capital and the rest for general corporate purposes. The base size of the issue is Rs 200 crore with a greenshoe option to raise it to Rs 400 crore.

The issue gives an option to choose from nine series of NCDs carrying fixed coupon and having tenures ranging from 27 months, 38 months, 60 months, 72 months and 87 months, months with monthly and cumulative interest option. Coupon rates range from 8.25% to 9.75%.

Muthoot Fincorp offers various financial services such as gold loans, two-wheeler and used car loans, affordable housing loans, small business loans, forex, money transfer, insurance and wealth management services. Muthoot Fincorp Ltd is one of India’s leading Non-Banking Financial Companies and part of Muthoot Pappachan Group, popularly known as Muthoot Blue.

Liquidity and Taxation of NCDs

If you invest Rs 1 lakh in Option IX-cumulative but unsecured- it grows to Rs 2.02 lakh in 87 months at an effective yield of 10.19%. But before you get swayed by high returns understand that there are two types of NCDs — secured and unsecured. At the time of liquidation secured NCDs are preferred over unsecured NCDs. Because of higher risks, unsecured NCDs offer a higher rate of interest than secured ones.

Though these bonds are tradeable on exchanges but are low on liquidity score. Moreover, interest income on NCDs is just like bank deposits. However, if they are sold within one year then the capital gain is chargeable to tax. For NCDs sold after a year of allotment long-term capital gain is levied. Short term capital gain is taxed according to your tax slab. So these are not tax-efficient unless someone is opting for the cumulative option and try to sell in the market after one year where the tax rates applicable will be 10%(long term tax rate for the listed securities).  It certainly offers good rates in absolute terms, but also brings credit risk in the portfolio.

Should you subscribe?

The issue has been rated A+ with a stable outlook by Crisil Ltd. Experts say Rating of A+ carry low credit risk but they are not as safe as bonds with AAA rating. Investors should be careful about credit risk and their tax implications before investing in NCDs.