An FD option that offers to lock in higher rates

India's largest player in commercial finance, Shriram Transport Finance Company Limited, is once again offering its Non-Convertible Debentures (NCD) with a base issue size of Rs 500 crore with the option of retaining subscription up to Rs 3,000 crore.

The NCD is offering a return of 11 per cent for a minimum tenure of 3 years, 11.25 per cent for 5 years and 11.50 per cent for 7 years, on its cumulative payout option. At a time when there are expectations of interest rates heading lower, this bond issue seems attractive to investors who wish to lock in their investment for a longer tenure. However, for an individual in the highest tax bracket of 30 per cent, the post tax yield would be 8 per cent for the maximum tenure option.

Most fixed deposits and short-term debt funds are giving lower returns, but the latter are more tax-efficient. For instance, within the debt fund category short term debt funds have returned 8.5 per cent on the basis of last one year returns (as on June 30, 2014), post tax returns on a long term basis would be about 7.6 per cent (10 per cent long-term capital gains).

Further, if interest rates were to head lower, funds in the long-term category would do better considering the bond net asset values (NAVs) are inversely proportionate to interest rates. However, there is no guarantee on the returns you would get.  

"Investors could consider such deposits if they are looking at investing a large sum for the interest rate differential to translate into a sizeable sum", says Gaurav Mashruwala, Certified Financial Planner. "Else, one could also look at investing into tax-free government bonds that provide similar returns, available in the secondary market", he adds.
 
The Shriram NCD issue has been rated AA+ by CARE and AA by CRISIL, which indicates high degree of safety regarding timely servicing of financial obligations and carrying very low credit risk. The company is India's largest player in commercial vehicle finance, established in the year 1979 with a network of 654 branches and 629 rural centres.

It has a niche presence in financing pre-owned trucks and small truck owners. Their gross non-performing assets (NPAs) as a percentage of total loan assets were 3.89% as of March 31, 2014 and the capital adequacy ratio was 23% compared to the minimum capital adequacy requirement of 15% stipulated by the RBI.

Shriram Transport has been able to achieve a relatively stable cost of funds despite the difficult conditions in the global and Indian economy and the resultant reduced liquidity and an increase in interest rates, primarily due to their improved credit ratings, effective treasury management and innovative fund raising programs. The proceeds of the issue will be used both for retiring existing debt and funding ongoing lending activities. Senior citizens will get an additional yield of 0.25 per cent per annum across all tenors.

The NCD offers listing on both NSE and BSE with an option of physical or demat bonds. The minimum application amount is Rs 10,000 and investors can choose to avail interest on a monthly, annually or cumulative basis. The issue is open from July 2, 2014 to July 22, 2014 and allotment will be done on a first come first serve basis. Fifty per cent of the issue is reserved for the retail investors, and 30 per cent is for high networth individuals, while the rest is divided between institutional investors.