Muthoot Finance Secured NCD Issue

by Manshu on December 20, 2011

in Fixed Deposits

Please go here for the latest post on the Muthoot NCD which opened on March 2 2012 and will close on March 17 2012. 

Muthoot Finance has raised quite a stir by coming up with a non convertible debenture (NCD) offer that’s offering upwards of 13% to investors.  This issue is quite different from the last Muthoot Finance NCD issue where the minimum investment amount was Rs. 1 lakh and there was just one option with a 2 year maturity.

In this issue, the minimum investment is Rs. 5,000 and they have four investment options.

The offer opens on December 22, 2011 and will close on January 7 2012. The lead managers are ICICI Securities Limited, AK Capital Services Limited, HDFC Bank Limited, and Karvy Investor Services Limited.

The NCD issue has been rated ‘CRISIL AA-/Stable’ by CRISIL and ‘[ICRA] AA- (stable)’ by ICRA, which is a good credit rating from both of these issuers.

Here are details on the four options that the Muthoot NCD has on offer.

Muthoot Finance Secured NCD

Muthoot Finance Secured NCD

The minimum investment is Rs. 5,000 which means you will have to buy 5 of these bonds at the minimum and they will list on the BSE after the issue closes.

Muthoot Finance’s latest quarterly report shows that the company has made consistent profits, and this is a secured NCD issue which means that certain assets of the company will be attached to the NCD in case of default. However, this doesn’t mean a guarantee of any kind, and if it comes to a default then investors might get less than the face value of the bonds.

I would say what I said the last time they came up with a NCD, which is that you shouldn’t be exposed to a lot of this in your debt portfolio. The yield is good, the company is currently doing well,  and that makes it easy to get swayed by the high yield and put in a big sum in it, but I think that won’t be wise.

You don’t want a lot of your money in just one type of debt instrument simply because if anything were to go wrong with that one thing – it will be devastating for your portfolio. I know it doesn’t look probable right now, but it didn’t seem probable that the Sensex will close near 15,000 at the beginning of the year either.

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{ 70 comments… read them below or add one }

Sanjay December 20, 2011 at 1:11 pm

I think debt fund investing in corporate bonds can be a good choice for average investors. But annual mgmt fee of debt funds in 1.75 % upwards.
Can you suggest some debt mutual funds where annual mgmt fee is less?

Reply

Manshu December 20, 2011 at 10:46 pm
Rahul December 20, 2011 at 3:26 pm

Hi,

What does interest rate means in NCD?
It means if I invest 5k for 24 months, I will surely get 5k+interest at the end of 24 months.

Is it same as fixed deposit?

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Jitendra P.S.Solanki December 20, 2011 at 4:01 pm

Hi Rahul,

Interest rate is on the investment amount.So if you have invested Rs 5k and interest rate is 13% p.a. then you will receive Rs 650 interest annually.The payout is different when its cumulative in which the interest i s paid at the maturity.

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Rahul December 20, 2011 at 8:05 pm

Thanks Jitendra. So, it is a safe investment and works on simple interest compared to fixed deposit.

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Manshu December 20, 2011 at 10:52 pm

Rahul – the big difference between bank fixed deposits and a company’s fixed deposit like Muthoot is that bank FDs are insured by RBI and if something happens to the bank then RBI pays you up to Rs. 1 lakh.

But if the company fails then you have no such recourse and your money is lost. Now of course, Muthoot is doing well right now, and there are no indications of this happening, but you never know what might happen in the future and that’s why I wrote at the end saying that you should not be exposed too much to the NCD of just one company.

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satyanarayana December 28, 2011 at 10:30 pm

manshu,
thanks for your reply. i need a clarification. this ncd is secured. in their prospectus, they specifically mentioned that some asset will be submitted to the trustee in order to provide the security to the investors. in that point of view, is this really secure? I read their financial prospectus that 11% is their margin on the funds. but they are offering 13.43% at max. their net assets are 2600 cr but they are doing business of 12,000 cr most of the money collected in the form of debts.

i cannot come to a conclusion as this business had bright light in recent time only. could you suggest me to invest for 66months. how secure this is.

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Manshu December 28, 2011 at 11:55 pm

My view on this and other offers has been that it’s not possible for me to ascertain if a company will go bust or go in default as far as their bonds are concerned. When something is apparently wrong then that call becomes easy, and when something is backed by the government or something like Tata Motors that belongs to a big group then that call becomes easy (on the other side) too.

But for these issues which are somewhere in the middle, it’s hard to say what will happen and if you want to juice up the yield on your fixed deposits then you can do that by taking a limited exposure to them say 5% or so.

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Jitendra P.S.Solanki December 21, 2011 at 1:13 pm

As compared to fixed deposit credit risk is always there in NCD. That’s why you are offered higher interest rate.Being a secured NCD you can still have it in your portfolio but keep your exposure to 5%.

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Vishal December 20, 2011 at 5:18 pm

Hi,

Just wanted to know… Do u need an DMAT account for applying to this NCD. They are proposing to list the same on BSE so think would this mean that the allotment will necessarily happen on DMAT mode?

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Manshu December 20, 2011 at 10:55 pm

I would think so since I didn’t see any mention anywhere that says you can buy the bond in physical form also.

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Manshu December 21, 2011 at 3:25 am

They came out with this earlier than the other companies, and I think the other companies saw that and raised rates.

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ARUN KUMAR SINGH December 21, 2011 at 1:47 pm

Firstly I would like to advise that please correct the date of closure of issue from 07.01.2011 to 07.01.2012 as mentioned above.
secondly I would like to know the networth of the company and the permission of the suthority(name )and also the maximum amount the company is allowed to garner from is issue of NCDs.
Thirdly I would like to know the amount payble at the time of maturity in case Rs.5000/- is invested in option IV.

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Manshu December 21, 2011 at 9:04 pm

Thank you for pointing out the mistake – I appreciate that, and it’s corrected now.

As for networth – I don’t have that info.

I’m not sure what you mean by permission of authority – if you could elaborate that then perhaps I could answer that. The maximum from this issue is Rs. 600 cr. but that doesn’t mean that that’s the maximum from NCDs. They can go and raise more money from the market if they want to and if there is appetite in the market for their debt offer. In that sense – I don’t think you can truly ever set a cap on the amount that a company can raise from NCDs.

It doubles in five and a half years so you will get Rs. 10,000.

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Milind December 21, 2011 at 5:30 pm

Currently all NCD issues by Muthoot are trading at discount 5 yr highest discount then 3 and 2 yrs
I think one if interested in buying new NCD , can buy them when listed at discount
2 yr looks safest
3 yr avg risk
5 may be bit more risk

Also I am wondering if Shriram Transport/Muthoot comes one NCD after another NDC just to pay the interest to existing holders by having new NCD so that they can pay interest to earlier ones or their business are really expanding and borrowing from banks is really expensive

Under what circumstances company wont pay NCD interest + principal ? Is there statutory obligation on them to pay it unless they declare bankruptcy ?

Any one can confirm if any company goes bankrupt then do Bond holders get preference before share holders ?

Thanks,
Milind

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Manshu December 21, 2011 at 8:51 pm

I am sure that bond holders get preference over share holders Milind, but I’m not so certain about the interest payment. I can’t recall a recent default situation to see how it panned out – I suspect they won’t stop paying interest unless the situation is quite dire because these companies do need to access the market very often and it will make there business unviable if they default on the interest payment.

Looking at the profits of the companies – they don’t seem like ponzi schemes to me! :-)

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Winnie December 22, 2011 at 1:21 pm

I don’t think they are raiding money through an NCD in order to honour the interest obligatiosn of prior debt, and I am very sure of this for Muthoot. During the press conference, Mr. George Alexander Muhtoot (Managing Director, Muthoot Finance) had mentioned that bank lines are easily available for the company, and the average cost of bank borrowings are about 11.5-12.00%. Hence coming out with an NCD is definitely not a cheaper alternative because bank lending is getting expensive. The logic I am deriving from the series of NCD issues is for Muthoot to be able to have steady and long term lines of credit. Bank lines fo credits are mostly CPs and Short Term Debts Instruments (Source: Please refer to the Rating Rationale for Muthoot Finance of ICRA and CRISIL websites). Hence for them to be able ot ahve 2, 3 and 5 year line of assured credit would mitigate the higher cost incurred for raising money through NCD. (The effective cost would be 13%+ atleast 0.5% to the investments bankers and 0.5% for cost of issue). Also, the most important point to note is that, the avearge tenure of a loan given by Muthoot is only 3-4 months (although the customer has the option to make the bullet payment by end of 1 year, most custoemr payback within 3-4 months (which is why till now the company has been having mostly short term bank lines). This would mean that the company would not have any probably cause for having to run a refinancing method, or refinance risk. Milind, I hope this adequately answers your question.

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Aakash December 21, 2011 at 8:26 pm

So the interest would be paid annually for Option 1. You have mentioned that NCD would be listed on BSE after issue closure. Does that mean there is a chance of the principal amount going down when listed?

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Manshu December 21, 2011 at 8:49 pm

Yes it will be.

Yes there is but only if you sell it on the market – if you hold it till maturity then you will get the full principal.

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Vinaya H S December 22, 2011 at 1:52 pm

Here’s my take on such classes of investments:

http://www.vinayahs.com/archives/2011/10/27/should-you-invest-your-money-in-companycorporate-fixed-deposits/

In general, you should think about investing in company fixed deposits/non-convertible debentures only when you have some surplus cash that you’re prepared to lose should the worst were to happen.

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amk December 22, 2011 at 2:12 pm

Will the cumulative option be subject to capital gains tax upon maturity? In that case, it becomes more tax efficienct than other options, besides eliminating reinvestment risk.

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Jitendra P.S.Solanki December 22, 2011 at 11:18 pm

@amk,

Since this is a fixed interest product you will pay tax on interest you receive at maturity.The capital gains won’t arise in this case.

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amk December 23, 2011 at 12:10 am

Does it mean that only if I hold this till maturity, I will be taxed on the interest (like a FD). If, I sell the Cumulative NCD at a premium 2 years down the line, it has to be subject to capital gains tax (as I never got any interest!!!). I think tax treatment, should not be a function of my holding period (i.e whether I hold till maturity or exit in between). Shouldn’t the tax treatment be similar to a FMP?

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Jitendra P.S.Solanki December 23, 2011 at 4:48 pm

Yes, if you sell it through stock exchange it will be subject to capital gain tax but in case you hold it till maturity and receive the principal along with interest it will be treated as interest income and not capital gains.In FMP you do not receive the interest directly but it is priced in NAV. For mutual fund who is holding the security and receiving the interest it will be interest income.For investors it is always a capital gain.

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Jitendra P.S.Solanki December 23, 2011 at 4:56 pm

There can be two income in this case if you are receive interest annually and sell it through stock exchange.The interest will be added to your “Income from other sources” while any profit on selling through stock exchange will be subject to capital gain tax.
If NCDs are sold with in a period of 12 months from the date of allotment, short term capital gains / loss (STCG) will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG).However do remember that in case of bonds & debentures there in no indexation benefit and so long term capital gain is taxed as 10.30%

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amk December 23, 2011 at 6:38 pm

Thanks. But the reason, I got confused is because of this BS article on Manappuram Zero Coupon NCD (400 day), which they said “This could be used as a capital gains instrument and become effectively tax free if held to maturity”. Any thoughts?

http://business-standard.net.in/india/news/manappuram-finance-limiteds-400-day-ncds/446627/

Reply

Jitendra P.S.Solanki December 23, 2011 at 11:51 pm

“The interest earned would be treated as any other interest (say, from a bank FD). It would be a part of your “Income from other sources”, and would be taxable. No TDS is applicable on debentures if they are listed on stock exchanges and are held in demat form.”

What this means is that if you have NCD in demat account there is no TDS. This NCD is available only in Demat form.If you hold it till maturity and do not sell, then there is no capital gains also. Now TDS is not deducted in debentures held in demat a/c and the interest you receive is below the exemption slab, your maturity proceeds will be total tax free . So if you hold the NCD in demat form up to maturity, it becomes a tax free instrument.

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Anup December 26, 2011 at 10:28 pm

Do you mean that if I am applying for a total of say Rs 50000 in the 5.5 year option and hold it till maturity, I am not entitled to pay any tax on the additional Rs 50000 income even if my total annual income lies above income-tax exemption limit (including Rs 1 lakh exemption)

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Samir Nigam December 22, 2011 at 4:13 pm

Hi Manshu,

Suppose that I have purchased 5 bonds (Rs. 5000) and chosen option IV (cumulative). As these bonds will be listed on BSE, suppose that after 3 years bond value increases ob BSE by 50% and if I chooses to sell these bonds. Then how much amount will get?

– (1500*5 = 7500) + 3 years interest of principal amount OR (1500*5 = 7500) + 5 years interest of principal amount after 5 years.

Regards,
Samir Nigam.

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Manshu December 23, 2011 at 4:40 am

Hi Samir,

You won’t get any accumulated interested – just what you get by selling it on the market. You will have to ensure that the price you get takes into account the accumulated interest.

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Milind December 22, 2011 at 5:04 pm

Thanks Winnie & Manshu for you reply.
Was bit cautious because within year them come with IPO , NCD I and now NCD 2
I will be mostly buying few NCD’s of 3 yrs on listing day on BSE (Hopefully with discount)
Thanks,
Milind

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Manshu December 23, 2011 at 4:51 am

That is understandable Milind and given my constant harping about risk – I can appreciate this more than most. I think most (almost all?) of us don’t have the capability to sniff out financial accounting problems and in the absence of that it’s best to spread your money around. Won’t you agree?

Winnie – I don’t mean to point out Muthoot and say it has a problem but in general that it would be impossible for most regular investors like us to find any sort of problems so best to spread the money around.

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Jitendra Sachdeva December 24, 2011 at 8:27 am

Is there any way to follow comments on any post without actually commenting on ? I found most of the posts on your blogs interesting but it is sometimes difficult to check comments daily on each post :)

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Manshu December 24, 2011 at 6:57 pm

Not that I know of I’m afraid – I’ll try to search for this and post a response here but I’m not very confident of finding something that will work the way you want it to.

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Jitendra Sachdeva December 25, 2011 at 11:06 pm

Do you have direct links of RSS feed of comments. Most blogs publish those. I can see one list which you publish as recent comments must be feeding data from somewhere.

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Ramesh December 25, 2011 at 12:49 pm

I am enjoying reading the above discussion and find it highly educative. Thanks everyone.

Mr Solanki has opined above that one should limit his exposure upto 5% for this issue.
Great. Does he have any similar suggestions regarding quantum of exposure on NHAI Tax free issue coming on 28th dec. also? Or may be percent of Fixed Income investments in ones portfolio!
Here allotment is likely to be prorata.

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Jitendra P.S.Solanki December 25, 2011 at 9:32 pm

Ramesh,

There are numerous opportunities which comes to the market in all investment segments.However, you cannot apply to them all and more importantly you have to look at your allocation wrt your financial goals. If you have a good amount of exposure in fixed return instruments then wiser to resist the temptation.

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Ramesh December 25, 2011 at 10:46 pm

thanks Jitendra.

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J.JAIKUMAR December 26, 2011 at 4:27 pm

with interest rates likely to fall does it make sense to invest in fmp of shorter duration

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Manshu December 27, 2011 at 3:12 am

I don’t know enough about FMPs to say anything about that.

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Nitin Mathur December 28, 2011 at 11:18 am

A novice question, since i want to invest in Muthoot Finance NCD
For example, I buy 1 bond with Face Value Rs 1000/- for 3 years.
Q1) After 3 years, is it possible, the value of bond goes less than Rs 1000/-. Lets say, after 3 years, can the bonds trade at Rs 900/- on the share market?
Q2) Let us assume, the value of the bond in the market after 3 years is Rs 1100/-, what should be the amount, I should expect back at maturity: Rs 1100+(Every year I get Rs 133.25/-). Is my understanding correct ?

Reply

Surat Das April 18, 2012 at 8:04 pm

Sorry for reply after ages. :(
Wanted to ask you, how can the NCD be traded in the market after maturity date of 3 years as per your example? So, your question is not valid. :)
The value of NCD changes as per the demand supply in the market. If you just hold it without trading, the value remains the same 1000/- (interest added, of course).

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Nitin Mathur December 28, 2011 at 11:23 am

A novice question, since i am planning to invest on Muthoot Finance. Example, I buy 1 bond with Face Value Rs 1000/- for 3 years.

Q1) After 3 years, is it possible for the bond value to go less than Rs 1000/- ?
Q2) Assume the value of the bond at the end of 3 years grows to Rs 1100/-, what would be the amount at maturity Rs 1100 (In addition i get guaranteed Rs 133.25/- every year for next 3 years)
Is my understanding correct ?

Reply

Manshu December 29, 2011 at 12:02 am

Nitin,

1. At maturity – you will get the face value from the company (if there is no default).
2 It’s not likely that the bond trades at a premium close to its maturity since the premium only exists because people want higher interest which won’t be the case if the bonds are close to their maturity date.

Reply

Nitin Mathur December 29, 2011 at 6:20 am

Thanks for the reply.
From point 1, is it possible for company to default, even though its a secured NCD. If the company defaults, Is there anyway to even get your principle back ?

From point 2, i understand, the value of bond may not increase when its closer to its maturity period. It should nearabout the same price as we bought it initially. Is it correct ? But is it possible, that the trading value of the NCD is lesser than the original price. In this case, the investor may lose his money :-)
I am just trying to get my fundas clear on NCD’s since i want to invest in this tool.

Reply

Manshu December 29, 2011 at 6:25 am

Yes that’s possible Nitin. If the company faces bankruptcy then they will not be able to pay the full amount on the NCD. They will auction the assets allotted against the NCD but that might not come up full or other people have have a claim to that as well.

When the NCD is close to maturity – you can just wait for the company to redeem it. When the company redeems it you will get the face value. So, that way it doesn’t matter at what price is it trading on the market.

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prajju December 29, 2011 at 7:42 am

Hi Manshu and all, thanks for all the information, making it easy to make the decision on investment.

Need help to understand how interest will be paid. Meaning, will that be credit to bank account from where NCD was purchased online or cheque or demand draft will be sent. Also do we need to do anything to get the interest payment or it will happen without anything to be done on date of interest payout.

Thanks
Prajju

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prajju January 4, 2012 at 1:29 pm

NO takers for my question?

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Manshu January 4, 2012 at 7:23 pm

It should come automatically to the bank account that’s linked to your trading and Demat account Prajju.

Reply

Aditya January 17, 2012 at 4:58 pm

has the allottment been made

Reply

PRAHLADA REDDY January 23, 2012 at 12:51 pm

I have subscriber for 50 NCDs of type4, Currently they are in my demat account and current ncd rate is at 1040 RS,, if i wanted to sell them like normal shares at current market price I can sell right ?..Can any one advise me on this plz…

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Manshu January 23, 2012 at 10:59 pm

Yeah, if that’s what they are quoting for when you sell them you will get that price.

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Hemant February 16, 2012 at 4:01 pm

I have subscribed for the MUTHOOT finance NCD option I by visiting their office personally and filling out the physical form in Jaipur office(Rajasthan) of the same. I had opted for physical delivery of the NCDs.

By mistake they have allotted me the 66 month (Option IV) instead of Option I which I have asked for. When visiting their office again they said nothing can be done about this as this is already done. They agree to the fact that I had asked for option I and it their mistake while handling the form but nothing can be done now as its allotted now.

Is there anyplace where a official complaints (Grievance Office ) can be logged and get it corrected.

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Ghanshyam March 7, 2012 at 6:15 pm

If a invest 1 lakh in IV option than we receive 2 lakh after 5 & half years so how much tax will we deducted.
1.I am received 2 Lakh
2.I am received 2 Lakh-Tax Deduction( Pls confirm how much tax%)

Pls confirm

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Manshu March 8, 2012 at 5:24 am

Tax will be deducted at your tax rate slab.

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RAJIB March 12, 2012 at 1:43 pm

i have purchased rs60000/-on dec11 no certificate has been issued i had purchaced through icicidirect.

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Amit Vadke March 13, 2012 at 6:50 pm

I have a question regarding NCD.One of my friend bought a TATA NCD in 2011 with a bond value of approx Rs.1000/- now the bond value is around 900/- so the interest he is getting quarterly is decreased now.so
1- isn’t the interest amount we get on our investment fixed?
2- does it vary as per the ups n downs in the market?
if yes then we cant say NCD is similar to FD. Let me know your comments on this as i want to get my fundas clear about NCD.

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subramanian April 25, 2012 at 4:00 pm

Even if we look at the yield, even after reduction of rates by banks this week, the annualised yield of Public sector banks for 5 years works out to 12.98 and for senior citizens 13.99 and for 10 years 14.35 and 15.57. much higher than mothoot. vide times of india, first page revised term deposit interest rates wef 24.04.2012

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ankm83 April 25, 2012 at 4:54 pm

The advertised Yield of PSU banks is not comparable as they are for cumulative bonds. To compare with Muthoot you have to incorporate the reinvestment of interest on NCD, eg. you buy 5 year bond at 13.25%, assuming reinvestment of interest; your 1000 re become 1863 in 5 years. Using the crude formula adopted by PSU banks for advertising, Yield on Muthoot is 863/(1000*5)= 17.26%, which is much higher than PSU’s 15.57%, despite considering the tax deduction available in tax sav bonds.

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Manshu April 28, 2012 at 9:03 pm

My thoughts exactly.

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Velusamy April 26, 2012 at 1:40 pm

Is it possible for me to buy this now? The interest rate looks attractive.

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Saravanan R April 26, 2012 at 7:10 pm

Can anyone hepl me to get Muthoot NDC on (Option I)

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Manshu April 28, 2012 at 7:49 pm

If you have a broker account or trading account then you can buy these like shares.

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Reply

kabir shran dagar May 11, 2012 at 3:22 pm

Dear Sir,
Please inform me what is the rate of interest of FD of your company (monthly & yearly). Please tell me.
Thanks
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9868266828

Reply

Chris August 28, 2012 at 3:52 pm

dear sir,

If i deposit 1,00,000 for 2 years , what will be the interest amount which i will be getting back?
please sent reply to krisjiji@gmail.com.
yours faithfully
Chris

Reply

Ashish September 4, 2012 at 4:12 pm

hi Chris,
It depends in which bond/NCD you invest, as there are different coupons and zero coupon bonds, you have to calculate the YTM if you buy from the secondary market ie NSE/BSE, but incase you get it directly from the company then they would specify that in the offer document.
And the prices and liquidity fluctuates a lot in secondary market so it would be difficult for anyone to say what returns you wud receive, you should target to buy the NCD at the lowest level possible.

Thanks,
Ashish

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Ashish September 4, 2012 at 4:08 pm

Hi,
I have one basic question, someone please answer it, what happens on maturity ie on the redemption date, does it automatically goes our from our Dmat account and the money gets credited to the account linked to the dmat or we have to fill some forms and there would be some time involved in getting out money back, As that time and efforts should also be considered in calculating the returns.
thanks,
Ashish

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Ashish June 20, 2014 at 8:52 am

Hi,

I am wondering if the question from other Ashish was answered. If not can someone please respond. Here is the question:

Hi,
I have one basic question, someone please answer it, what happens on maturity ie on the redemption date, does it automatically goes our from our Dmat account and the money gets credited to the account linked to the dmat or we have to fill some forms and there would be some time involved in getting out money back, As that time and efforts should also be considered in calculating the returns.
thanks,
Ashish

Reply

Shiv Kukreja June 20, 2014 at 12:45 pm

Hi Ashish (both of you),
Once a bond/NCD held in a demat account matures, the money automatically goes into your bank account and the bond/NCD stands extinguished.

Reply

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