Bonds, Company Fixed Deposit Are Products Contribution High Interest Rates

Bonds, company fixed deposit are products contribution high interest rates

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Admission Corner

Fixed income investors are constantly in search of products that offer them higher interest rates. With interest rates inching up,

fixed deposit

and bonds have caught their concentration. And guess what? They really have a lot to choose from these days.

Apart from the traditionally safe bank fixed deposits, today, there are company fixed deposits from the likes of Mahindra Finance and Shriram Transport offering 10.50% to 10.75% per annum. Some others, like Plethico Pharma, United Spirits and JaiPrakash Industries, are offering between 11% and 12%. Moreover, there are listed bonds from Tata Capital, L&T Finance and Shriram Transport, which give a yield of about 11% to 12% per annum.

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You can, for example, buy a bond of Shriram Transport Finance – NG series, which has a duration of about 5 years 9 months, and a yield to maturity of 12.72%, or you can buy an L&T Finance – N5 bond, which has a duration of about 1 year, 9months and acquiesce to maturity of 11.83%. The yields are about 100 to 250 basis points higher than that offered by bank fixed deposits.

HOW THEY WORK FOR YOU

You can invest in company deposits through a distributor or agent. Bonds, on the other, can be bought through a distributor only when there is an initial public offer (IPO). They are listed on the stock exchange after the IPO and can then be bought through a stock broker.

Company deposits give you the option of receiving income monthly, quarterly, half yearly, annually or on a cumulative basis. A bond gives you income in two ways. The first one is the coupon or the interest income, which could be payable monthly, half yearly or annually or on maturity. The SBI bonds, for example, pay interest annually. If you have invested.`10,000 in the 15-year bond, which has a coupon rate of 9.95%, you will get .`995 as interest income for every bond you hold in April every year till maturity.

However, one must remember that this could work vice-versa, too. “If interest rates were to move significantly upwards, as is the case now, the bond prices could move down,” cautions Anup Bhaiya, MD and CEO, Money Honey Financial Services.

For example, the L&T Capital N5 option, with an 8.4% coupon, with interest payable on a halfyearly basis, now trades at .`970, lower than its issue price of.`1,000. The way out is to hold it till maturity. Then there is no interest rate risk.

“Investors who plan to hold till maturity should buy these bonds. In case interest rates rise, there could be short-term mark-tomarket losses on your portfolio,” says Vishal Dhawan, founder, Plan Ahead Wealth Managers.

The second way you could make money in bonds is through capital appreciation. For example, the first series of SBI bonds – N2 series were issued at .`10,000 and got listed at .`10,500, thereby providing a capital appreciation of.`500 per bond or 5% to investors.

Source: [ET]

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