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Is IIFL Home Finance’s NCD a good option for investors?

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Tranche-I of the unsecured NCDs by IIFL Home Finance has a base size of 100 crore, with a greenshoe option to retain oversubscription of up to 900 crore. The issue will close on 28 July.

According to experts, investors should note that unsecured NCDs carry a significant amount of risk. On the other hand, secured NCDs are backed by specified assets of the company.

The NCD of the technology-driven housing finance company has been 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 safety regarding timely servicing of financial obligations; however, they are not as safe as AAA-rated issues.

According to the non-banking financial company (NBFC), the net proceeds of the issue will be utilized for the purpose of onward lending, financing, and for repayment or prepayment of interest and principal of existing borrowings and the balance will be utilized for general corporate purposes. The NCD has a face value of 1,000 with a minimum application size of 10,000, and in multiples of one NCD thereafter.

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

There are four categories of investors in an NCD; Category I is for institutional investors; Category II is for non-institutional; Category III is for high net-worth individuals; and Category IV is for retail investors. Under the issue, 40% each of the overall issue size has been allocated for retail investors as well as high net-worth investors (HNIs) and 10% each for institutional and non-institutional investors.

Rushabh Desai, a Mumbai-based mutual fund distributor, who wouldn’t recommend this product at this point of time, highlights two big red flags.

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

According to Desai, the other major risk factor is the tenor of the issue, which is more than seven years and there can be liquidity issues if investors want their full corpus back in between.

According to experts, NCDs are vulnerable to risks related to economic conditions.“The economy is still not yet completely opened up and we are near the possibility of a third wave as well. The economy is at a very delicate juncture. Therefore, investors should avoid taking unnecessary risk,” said Desai.

Some financial advisers are of the view that investors can put money in such avenues in certain conditions.

“In terms of interest rate, the issue looks quite attractive. However, those investors who have sufficient surplus in their hands or have moderate-to-high risk profile should go for these instruments. This issue may even appeal to retired people who have their cash flows sorted and have some risk appetite,” said Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth.

However, Chetanwala said that investors should remain extra cautious while investing in an NCD issue. Investors generally end up investing in NCDs for getting a return higher than what a bank fixed deposit (FD) offers without realizing that the risk level here is higher.

Moreover, investors should also consider the tax aspect when investing in NCDs. If NCDs are sold within a year, short-term capital gains (STCG) tax will be applicable as per the income tax slab rate. If the NCDs are sold after a year or before the maturity date, long-term capital gains (LTCG) tax will be applicable at 20%, with indexation. Moreover, investors should note that interest income from NCDs is taxed in a similar manner as fixed income securities under ‘income from other sources’.

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

Hence, your post-tax returns will be much lower. NCDs can work for those in the lower tax category or those with no taxable income.

Retail investors can look at having some part of their debt portfolio in NCDs, but before investing, they should look at the credit profile of the company and must stay away from issues that are rated below AA.

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