Is IIFL Home Finance NCD a good option for investors?

Tranche I of NCDs unsecured by IIFL Home Finance has a base size of 100 crore, with a greenshoe option to maintain an oversubscription of up to 900 crores. The show will close on July 28.

Experts say investors should note that unsecured NTMs carry significant risk. On the other hand, the secured NCDs are backed by specified assets of the company.

The technology-driven housing finance company NCD was rated AA with a stable outlook by Crisil Ratings Ltd and AA + with a negative outlook by Brickwork Ratings India Pvt. Ltd. The AA rating is considered to have a high degree of security with regard to the timely service of financial obligations; however, they are not as secure as AAA rated shows.

According to the non-bank financial corporation (NBFC), the net proceeds of the issue will be used for the purposes of lending, financing and repayment or early repayment of interest and principal of existing borrowings and the balance will be used for purposes of the company. The DEM has a face value of 1000 with a minimum application size of 10,000, and in multiples of a DEM thereafter.

There will be three interest payment options, in which the coupon rate will be 9.6% for the monthly mode and 10% for the annual. The company has not provided the coupon rate for the cumulative option. There is only one tenor option available in this issue of NCD, which is 87 months.

There are four categories of investors in an NTM; Category I is intended for institutional investors; Category II is for non-institutional investors; Category III is intended for wealthy people; and Category IV is intended for retail investors. As part of the issue, 40% each of the overall issue size was allocated to retail investors as well as high net worth investors (HNIs) and 10% each to institutional and non-institutional investors.

Rushabh Desai, a Mumbai-based mutual fund distributor, who would not recommend this product at this time, highlights two big red flags.

“First, the credit rating is AA by Crisil, which is not even AA +. Thus, it can be termed a low credit product. The second factor is that the issue is an unsecured debenture, which means that it is not backed by any assets. If the company defaults, there is no guarantee that investors will get their capital back, ”Desai said.

According to Desai, the other major risk factor is the duration of the issue, which is more than seven years and there may be liquidity issues if investors want to get their entire corpus back.

Experts say NCDs are vulnerable to risks associated with economic conditions. “The economy is not yet fully open and we are also close to the possibility of a third wave. The economy is in a very delicate phase. Therefore, investors should avoid taking unnecessary risks, ”Desai said.

Some financial advisers are of the opinion that investors can invest money in such avenues under certain conditions.

“In terms of interest rates, the issue looks quite attractive. However, investors who have sufficient surplus or who have a moderate to high risk profile should opt for these instruments. This issue may even be of interest to retirees who have sorted their cash flow and have a certain risk appetite, ”said Harshad Chetanwala, Sebi registered investment advisor and co-founder of MyWealthGrowth.

However, Chetanwala said investors should remain very careful when investing in an NTM issue. Investors usually end up investing in MNTs to obtain a higher return than that offered by a fixed bank deposit (FD) without realizing that the level of risk here is higher.

In addition, investors should also consider the tax aspect when investing in NTMs. If the CRS are sold within one year, the Short Term Capital Gains Tax (STCG) will be applicable at the income tax rate. If the CRS are sold after one year or before the maturity date, the Long Term Capital Gains Tax (LTCG) will be applicable at 20%, with indexation. In addition, investors should note that interest income from NCDs is taxed in the same way as fixed income securities under the heading “income from other sources”.

NTMs are taxed at your slab rate, which means that if you are in the highest tax bracket, the interest you earn will be taxed at 30%.

Therefore, your after-tax returns will be much lower. NTMs can work for people in the lower tax category or for those with no taxable income.

Retail investors may consider having a portion of their debt portfolio in NTMs, but before investing they should review the company’s credit profile and should avoid issues rated below AA.

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