Wealthy investors chase risky bonds and market-linked debentures: Here's why

Asia's Tech News Daily

#Bonds, debentures, #invest, interest rate, lower rated bonds, consider market-linked debentures, Nifty 50 index, with high credit risk

The low interest rate environment and soaring equity market have nudged savvy and rich investors towards fixed-income investments that offer higher yields. Others are also looking at market-linked debentures for better tax-efficient returns. Though returns appear attractive, experts say that these instruments come with higher risks.

Nitin Rao, CEO, InCred Wealth says, “AAA-rated high-quality bond yields are low and in some cases the real rates (return less inflation) are negative. Investors looking for positive real rates are now going down the risk spectrum, looking for high interest paying AA and lower rated bonds in fundamentally sound companies.”

Going down the rating curve

There are three types of low-rated (AA and below rating) bonds being offered to investors looking for better yields.

Traditional bonds pay a fixed coupon in the range of 9-10.5 percent for tenures ranging from two to three years. These are mostly rated AA and A. These bonds pay regular interest. But there is one drawback from the point of view of high networth individuals. The interest is clubbed with their income and taxed at their slab rate.

That makes investors consider market-linked debentures (MLDs). There are two variants of these MLDs. The first variant offers payoffs in line with the movement in underlying security. The payoff could be linked to a benchmark, say the Nifty 50 index. So, a certain MLD may offer 110 percent of the move in Nifty over the next three years. If the Nifty delivers 50 percent absolute returns over next three years, then the investor will receive 55 percent returns. In case the Nifty gives negative returns, the issuer returns the principal to the investor. These are termed as principal protected MLDs. If the investor is willing to forego principal protection, then he can get higher participation in the benchmark’s return.

“Investors who wish to participate in the stock market rally, but want to protect their capital are going for principal-protected MLDs offering payoffs linked with the movement in benchmark indices such as the Nifty,” says Feroze Azeez, Deputy CEO, Anand Rathi Wealth Management.

The second variant of the MLD, however, is designed with the sole objective of taking advantage of the tax-efficiency (or the loophole in tax rules) these bonds offer. Some issuers bring in a seemingly-impossible condition attached with the payoff. It could be an 80 percent fall in Nifty over the tenure of the bond – say two years. So, the issuer pays interest at, say, 10 percent if the Nifty does not fall 80 percent or more in next two years. If it falls 80 percent or more, then there is no interest to be paid. Only the principal is paid back to the investor. In these cases the investors are fairly aware that they are going to pocket the coupon.

The payoff from most of the MLDs are decided on the date of maturity. Just before the maturity, these MLDs are sold by ascertaining the fair price in the secondary market. The issuer or the arranger of the issue makes necessary provisions for the same. Since they are sold in the secondary market, the money received by the investor is treated as capital gains. For a listed bond held for more than one year, profits are treated as long term capital gains and taxed at 10 percent without indexation.

This works the best for the high networth individuals who would otherwise be taxed at much higher rates.

The size of the trade

Most of these bonds are issued to large institutions and brokers. These brokers then sell it in the secondary market to the investors. The minimum ticket size is Rs 10 lakh in most cases. And the wealth management firm or the broker facilitating the deal may stipulate the minimum deal size between Rs 30 and 50 lakh. Since these are secondary market deals, it is difficult to estimate the correct size of the market. However, various estimates say that almost Rs 800-1000 crore worth of deals are done per month. If inflation remains sticky and the interest rates do not catch up, then the demand for such investments is expected to increase.

Not a risk-free investment

These investments come with high credit risk. The money so raised is utilized by the issuer for lending to businesses. And many times, they cater to that segment of the economy which is not funded by banks, thus involving high credit risk. The ratings are vocal about it – as they range between AA and BBB.

“Investors should not blindly pick up bonds offering high yields. They have to analyse the risks involved and take an informed decision,” says Rupesh Nagda, Founder and Managing Director, Family First Capital. Most of these bonds and MLDs mature in a maximum of four years. It is better to avoid long-term bonds involving high credit risk at a time when interest rates may rise. “We do not recommend low-rated bonds maturing beyond three years,” Nagda adds.

To offer the payoff linked to a volatile stock market index, the issuer has to create an option structure that pays off at the time of maturity. The issuer should carry out this option purchase transaction on the stock exchange to nullify counterparty risk. If the issuer enters into a private forward agreement, then there is a counterparty risk.

“Though low-rated bonds offer good returns, they suffer from low liquidity in the secondary market. It was observed in the past that in case there is a crisis, it is almost impossible to sell them in the secondary market,” says Vaibhav Porwal, Co-Founder, dezerv. He says investors must buy with the view of holding them till maturity, if they understand risks.

Though these bonds and MLDs look attractive, they cannot be your core fixed income holding. Retail investors should avoid these, given the ticket size and enhanced risks.

High networth individuals, whose core portfolios are well-diversified may consider them if they have a high risk appetite.

Internet Explorer Channel Network
Asia's Tech News Daily
News Related


After record fund raising in November, 8-10 IPOs expected this month

Anand Rathi Wealth IPO November 2021 turned out to be great for the primary market as 10 main board companies closed their public issues during the month and reported a ... Read more »

Anand Rathi IPO subscribed 17% on first day of bidding, retail portion booked 29%

Anand Rathi Wealth IPO The initial public offering of Anand Rathi Wealth, one of the leading non-bank wealth solutions firms in India, has been subscribed 17 percent as it received ... Read more »

Rakesh Jhunjhunwala-backed Star Health IPO subscribed 20%, retail portion booked 91%

Star Health IPO | Promoter Rakesh Jhunjhunwala is the second largest shareholder in the company. The public issue of Star Health and Allied Insurance Company continued to see muted response ... Read more »

Saving for your daughter's future? A mix of Sukanya Samriddhi and equity funds works best

The Sukanya Samriddhi Yojana (SSY) is a debt product and will always give predictable but debt-like returns. Equity funds, on the other hand, can deliver much better returns in the ... Read more »

iPhone 13 demand weakens ahead of holiday season

The US tech giant had previously cut down its iPhone 13 production estimates by 10 million units due to the ongoing chip shortage. iPhone 13, launched earlier in 2021, has ... Read more »

Gold Prices Today: Yellow metal likely to be range-bound at Rs 47,700-48,200; buy on dips

Gold,Gold prices A strengthening dollar left gold a little dimmed on December 2, as investors assessed how the central banks would respond to a surging inflation and concerns over economic ... Read more »

You are invited to join "2022 Thailand Ready for Investment"

The Thailand Board of Investment (BOI) cordially invites you to join the seminar titled “2022 Thailand Ready for Investment”. Date: 9 December 2021 (Thursday) Time: 14.00 – 18.00 hrs. Venue: ... Read more »

Dollar rises to 74.75 rubles

The euro increased by 47 kopecks and reached 84.15 rubles Read more »

Mahindra Logistics gains 9% on warehouse deal with LOGOS

Mahindra Logistics share price scaled 9 percent to Rs 728.85 in the early hours of trade on December 2 after the company entered into a long-term lease agreement with LOGOS. ... Read more »

These small finance banks offer up to 6.50% interest on one-year fixed deposits

The Omicron variant of the coronavirus has triggered global alarm. In such circumstances, it’s important to build an emergency corpus. Invest a part of your savings in liquid assets. Despite ... Read more »

OPEC+ ministers will assess oil output plan for January amid new coronavirus variant

So far, oil exporters, which account for around 40% of world oil output, have been recovering oil production at an equal pace since August Read more »

Razer executive-led group offers to take firm private, valuing it at $4.3 billion

The offer price is a premium of around 44 per cent to Razer’s closing price on Oct 28, 2021. BENGALURU (REUTERS) – Razer said on Thursday (Dec 2) that a ... Read more »

JMC Projects surges 16% on winning new orders worth Rs 1,795 crore

JMC Projects (India) shares surged 16 percent in early trade on December 2 after the company won new orders worth Rs 1,795 crore. “JMC Projects (India) has secured new orders ... Read more »

JPMorgan says buy the dip as Omicron may signal pandemic ending

SINGAPORE (BLOOMBERG) – The recent market turmoil caused by the emergence of the Omicron virus strain may offer investors a chance to position for a trend reversal in reopening and ... Read more »

Christmas shoppers warned about fake online reviews - here's how to protect yourself

The Competition and Markets Authority (CMA) is leading an investigation into fake reviews, which includes a formal probe into Amazon and Google over concerns they have not been doing enough to combat false write-ups left on their sites. Read more »

Apple tells suppliers demand for iPhone 13 line-up has weakened

TAIPEI (BLOOMBERG) – Apple, suffering from a global supply crunch, is now confronting a different problem: slowing demand. The company has told its component suppliers that demand for the iPhone ... Read more »

Daily Voice | What makes banking and financials, realty and allied sectors interesting, shares Mahesh Patil of Aditya Birla Sun Life AMC

The equity market is meant for long-haul investments because of its characteristic volatility. A correction of 10-12 percent that the market has witnessed through the last week, however, offers a ... Read more »

Hong Kong stocks rise amid hopes of the city's borders reopening with mainland China

Hong Kong stocks rose for a second straight day on expectations of the much-awaited border reopening with mainland China, even as sentiment elsewhere has been affected by the new Omicron ... Read more »

General Atlantic appoints Mastercard's Ajay Banga as Vice Chairman

Ajaypal Singh Banga (Image: Reuters) Global growth equity giant General Atlantic has announced the appointment of former Mastercard CEO Ajay Banga as Vice Chairman. Banga will advise on strategic matters ... Read more »

Novavax COVID jab manufacturer reveals £400m Teesside plant expansion

Fujifilm Diosynth Biotechnologies sees up to 350 jobs being created at the facility in Billingham, in an announcement hailed by the prime minister as a significant investment. Read more »

Asia shares in choppy trade as Omicron worries leave markets on edge; STI down 0.3%

Japan’s Nikkei lost 0.6 per cent. HONG KONG (REUTERS) – Asian stocks were mixed in choppy trading on Thursday (Dec 2) after a sharp reversal on Wall Street on concerns ... Read more »

Cryptocurrency Prices today on December 2: Bitcoin, Ethereum, Binance Coin, XRP fall while Solana rises

The global crypto market capitalisation declined 0.63 percent over the last 24 hours to stand at $2.63 trillion. Bitcoin, currently trading at $57,157.85 saw a surge in its market dominance ... Read more »

Exclusive: Swiggy, Meesho backer Elevation Capital eyes $600 million fund

Representative image. Elevation Capital, an early investor in Swiggy, Paytm and Meesho, is said to be in talks to raise $600 million, barely a year after its last fund, to ... Read more »

Tinder owner to pay founders $441m to settle valuation lawsuit

Tinder’s owner is paying the app’s founders millions to settle a lawsuit. NEW YORK: The company that owns Tinder will pay $441 million to the popular dating app's founders to ... Read more »

Macau casino junket operator Suncity sinks further after Alvin Chau steps down as chairman

Shares of Suncity Group Holdings, Macau’s largest casino junket operator, fell 16.7 per cent on Thursday after its controlling shareholder Alvin Chau Cheok-wa stepped down as chairman. Chau was arrested ... Read more »

New Zealand milk production up but cow numbers fall

Cows in New Zealand’s $37 billion dairy industry produced record milk volumes last season despite a fall in their numbers. The latest annual NZ Dairy Statistics report from industry good ... Read more »

Hot Stocks | Bet on Bajaj Holdings, Union Bank of India for up to 17% return in short term

Rohan Patil, Research Analyst at Bonanza Portfolio The benchmark Nifty50 index witnessed a gap-up opening and traded above 17,080 for a major part of the day on December 1. It finally managed ... Read more »

Trade Spotlight | What should you do now with IndusInd Bank, Chambal Fertilisers, Texmo Pipes, & BSE?

Positive global cues and domestic economic data have helped the market rebound sharply. The BSE Sensex rallied more than 600 points to 57,685, and the Nifty50 climbed 184 points to ... Read more »

CBS: CO2 emissions from biomass increase by 16 percent

The CO2 emissions caused by biomass increased by 16 percent in 2020, according to figures from Statistics Netherlands (CBS). The increase is mainly due to the fact that power plants ... Read more »

Become globally recognized: Steps to take your business global

Every business wants to become the next Amazon. It's a beautiful dream to have – to go global and have your brand name plastered in every major city in the ... Read more »

Debt collectors OK'd to use social media to reach borrowers

There are strict guidelines governing how a collector can reach out on platforms like Facebook, Instagram and Twitter, according to the Consumer Financial Protection Bureau. Read more »

Sembcorp taking 35% stake in Chinese renewable energy company for $320m

SINGAPORE (THE BUSINESS TIMES) – Sembcorp Industries is acquiring a 35 per cent interest in SDIC New Energy, a power company in China with a portfolio of 30 operational wind ... Read more »

Cramer's lightning round: Buy Canadian Pacific if you believe in economic recovery

Carnival Corp.: “No, too early, too early. The one is Norwegian. That's the one that's got the best balance sheet, and the best situation, then maybe we can go down ... Read more »

Kaisa to meet offshore bondholders over repayment options, including notes that can be swapped with Sing Tao stock

Embattled Chinese developer Kaisa Group Holdings has agreed to meet its offshore bondholders and discuss ways of repaying loans, including selling convertible bonds that can be exchanged for shares of ... Read more »

Asia-Pacific stocks fall as omicron variant fears continue to weigh on market sentiment

SINGAPORE — Stocks in Asia-Pacific fell in Thursday morning trade, as concerns over the economic impact of the omicron Covid variant continues to weigh on investor sentiment. The Nikkei 225 ... Read more »

Charts suggest stocks may fall further before powerful Santa Claus rally kicks in, Cramer says

There could be more near-term pain for the stock market before it reverses course and mounts a year-end Santa Claus rally, CNBC's Jim Cramer said Wednesday, leaning on technical analysis ... Read more »

Tel Aviv is the most expensive city in the world

Not Paris, New York or Singapore, but Tel Aviv will be the most expensive city in the world to live in in 2021. According to research by the British business ... Read more »

Wealth inequality is decreasing as house prices rise

Photo: ANP Wealth inequality in the Netherlands is decreasing as a result of the rise in house prices. At the beginning of last year, the 10 percent richest households owned ... Read more »

US companies battling rising prices and labour shortages: Fed survey

WASHINGTON (REUTERS) – The US economy expanded at a modest-to-moderate pace in October and the first half of November while firms grappled with rising inflation and a scramble to fill ... Read more »

Thailand expected to see major 5G growth Planned merger seen boosting investment

Thailand's revenue from 5G technology is predicted to reach US$41 billion by 2030, while almost half of mobile subscribers are expected to have access to the fifth-generation service by 2027, ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic