This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at email@example.com
Muthoot Finance Limited will be hitting the streets again next week to raise Rs. 500 crore in the public issue of its non-convertible debentures (NCDs). The company will be issuing its secured and unsecured NCDs across eleven different interest payment options. This will be Muthoot’s first public issue in the current financial year.
The issue will open on May 26 and is scheduled to remain open for a month to close on June 26. Like always, the company has the option to either close the issue earlier or extend it further depending on the response to the issue.
Here are the issue details for you as an investor to consider:
Interest Rates on Offer – Muthoot has decided to cut its interest rates by 50 basis points or 0.50% per annum across all the options over the interest rates it offered in its last issue. Also, the company was offering to double your money in 72 months till its last issue, which it has increased to 75 months this time around.
Credit Rating – ICRA has rated this issue as ‘AA-’ with a ‘Stable’ outlook. The outlook was ‘Negative’ till the last issue as there were many uncertainties that the gold loan industry was facing due to some tough measures taken by the finance ministry as well as the Reserve Bank of India.
Also, these NCDs are ‘Secured’ in nature, except those which promise to double your money in 75 months.
Minimum Investment – To invest in these NCDs, you need to invest a minimum amount of Rs. 10,000 i.e. 10 NCDs of Rs. 1,000 face value.
Listing – Muthoot will get these NCDs listed on the Bombay Stock Exchange (BSE) within 12 days from the date the issue gets closed.
Demat/Physical Option – Though the investors have the option to apply for these NCDs in the physical form as well as the demat form, this option is limited to NCDs under options I to VI. Applicants will not be able to apply for allotment of these NCDs in physical form under options VII to XI i.e. these NCDs will be allotted only in dematerialised form under options VII to XI.
Taxability & TDS – Interest earned on these NCDs is taxable as per the tax slab of the investor and if the interest amount exceeds Rs. 5,000 in any financial year, then the company will deduct TDS on the interest amount.
Categories of Investors & Allocation Ratio – The investors have been classified in the following three categories and the maximum portion has been reserved for the retail investors:
Category I – Institutional Investors – 5% of the issue is reserved
Category II – Non-Institutional Investors, Corporates – 5% of the issue is reserved
Category III – Retail Individual Investors including HUFs – 90% of the issue is reserved
NRI Investment – Like in the past issues as well, Non-Resident Indians (NRIs) are not allowed to invest in these NCDs.
Gold prices have started to decline here in India. There are various reasons for that – a stronger rupee against the US dollar, the RBI easing the import curb norms, low demand due to high import duty and the US economy improving steadily. With an inevitable cut in import duty sooner or later, the gold prices are all set for a further decline.
With higher risks of gold prices coming down and concentrated business model, gold financing firms are set to face some riskier times ahead. I would personally avoid making any investment in gold financing companies, be it equity investment or debt investment.
Also, Religare and Edelweiss’ ECL Finance are planning to launch their respective NCD issues in the first fortnight of June. I would rather wait to check the interest rates and other features of those issues before I advise my clients to invest in any of these issues.
Application Form of Muthoot NCDs
Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in Muthoot NCDs, the investors can reach us at +919811797407
I know that this is a very big issue for a large number of retail investors whether they know it or not. I say that because Colin is actually in the minority in the sense that he is aware of the fact that he doesn’t know how to calculate the return of an insurance policy. The vast majority of people who own insurance policies don’t know how to calculate the returns, or if they know the mechanics of it, are not aware of the actual numbers they should use, and that is a bigger issue than the calculation itself.
How do you calculate the return on an insurance policy?
At very basic level, there are two numbers you have which are how much premium you pay every year, and what is the final amount you are expected to get. You use these two numbers to get the rate of return on your investment.
This is very simple if you don’t want to understand the maths behind this (which you probably don’t need either). Go to this annuity calculator, and click on “Rate”. After that enter the values as follows:
The system will calculate a rate of return for you after you enter these three values and this is the rate of return of your insurance policy, and if you are entering actual numbers from your policy, I would expect them to be in the mid to lower single digit range because that is generally what most insurance policies return.
Which numbers to use in the return calculation of your insurance policy?
This is often the harder part where the brochures and tables that you are shown often have little stars on them with subtle disclaimers that confuse the issue and make it hard to decide which numbers to use.
Every insurance policy that provides returns will either have a guaranteed and variable return, or just variable return or just guaranteed return.
If you just have guaranteed return then use that to see how much is the rate of return.
If you have only variable or a mix of variable and guaranteed then carefully go through the documents to ascertain where the distinction is and you will have to input one or more numbers to account for the assumptions they are making at various return points, and see what the policy is likely to net you in different projected scenarios. Even then, please appreciate that these are projections and may not come to realize at all if the insurance company doesn’t make as much money as they hoped they’d make.
This is definitely the harder part of calculating returns and requires some judgment calls and also the understanding that all you have is assumptions and there is no guarantee that any of this may come to pass.
How to measure the returns against a term plan?
Once you have calculated returns or have some general idea of what those returns might be, go to the website of any life insurance company and get an estimate of what an equivalent pure term plan will cost you. Now, deduct that amount from your premium and see how much money you save, and if you invested that in a simple bank fixed deposit how much money you’d make. In most cases, you will find that this combination is better than whatever policy you currently own.
If you have insurance policies, and have never done this exercise then I’d highly recommend doing it and getting a sense of how much you are paying for the insurance, and whether you can substitute that with a term plan and the remaining money in a fixed deposit or a mutual fund.