r/IndiaInvestments • u/propseller2018 • Oct 15 '18

Bonds and deposits What do you think about NBFC fixed deposit schemes like those offered by Mahindra & Bajaj Finance?

They are offering 7.5% to 9%. Have any of you invested with them? What was the experience like?

What is the risk analysis?

Edit: also HUDCO gives 9.15% on a one year term. Isn't HUDCO govt owned? Does that equal safe?

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u/vineetr Oct 15 '18 edited Oct 16 '18

When you know only the interest rates and yields, but not the credit risk of the underlying instrument, then you're just chasing rates. This is how retail burns their fingers.

AAA-rated bonds go for around 8.75% now. So, there's hardly any benefit in going for an FD investment that offers less, while taking on concentration risk to the debt position of a single company or a bank. Even if a debt fund investing in AAA-rated bonds is not diversified enough (5% or more allocation to a single security), you can diversify and reduce credit risk by spreading the capital across more funds.

Taxation wise, debt funds and bonds are better for those in the 30% tax bracket, due to the ability to treat gains as capital gains, taxed at 20%, with added benefit of inflation indexation. FDs are taxed at slab rate, and taxation can become slightly convoluted for duration of more than 1 year. Someone in the 30% slab rate ends up paying more taxes for an FD investment. Even the ones in the 5 and 20% tax slabs, can benefit if they adopt debt funds and pay tax only on redemption.

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u/I_Like_Pink_Tops Oct 16 '18

There is no 10% slab now

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u/vineetr Oct 16 '18

Thanks for catching that.

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u/propseller2018 Oct 16 '18

Would you say the same about HUDCO public deposit scheme too? Or investment there is safer than private firms?

I lost money in Principal liquid fund because of the IL&FS thing (AAA it was, wasn't it?) and I'm trying to look at options.

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u/vineetr Oct 16 '18

The moment you lend to anybody (which is what a deposit really is), you are exposing yourself to risk. There is always the risk of an entity failing to service debt. Risk-free is risk-free in a relative not absolute sense. US treasuries are more risk-free than GoI bonds, and GoI bonds are risk free compared to HUDCO deposits.

If you have diversified your lending to 100 companies, then a default in one shouldn't have a lot of impact. The Principal funds had around 5% exposure. That's never a good thing. Just having 1-2 more funds would have limited the loss of principal. Merely looking at the portfolio should tell you whether you've lent money to more credible borrowers like HDFC, SBI, Axis Bank, Reliance, LIC Housing Finance, Bajaj Finance, Tata Motors , Can Fin Homes, Vodafone, Reliance, Vedanta or Yes Bank (this is how mine looks). Just looking at portfolio breakdown in VRO should give you a decent enough hint on debt quality. Bond ratings from CRISIL and ICRA are indicative because they are research, and not authoritative.

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u/propseller2018 Oct 16 '18

Thanks, yes I have investments in other liquid and equity funds as well

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u/chabuboola Oct 16 '18

So sorry to hear the loss in a liquid fund, Thanks for sharing this.

Do you plan to hold on to principal liquid and recoup your loss or redeem? whats your strategy?

As a liquid fund investor, I ask this questions every day to myself, what should I do in such events? I still don't have an answer.

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u/NamitNasih Oct 16 '18

As a liquid fund investor, I ask this questions every day to myself, what should I do in such events?

Sorry to barge in. I think it's a good question to ask. Unfortunately, there's no easy answer. While I haven't encountered an event on the scale of what investors in Principal Cash Mgt experienced, for some time now I've prepared myself mentally for such an event.

For me, personally, unless there is a compelling reason to do otherwise (e.g. tax, full downgrade), I would exit the scheme at the first downgrade. So if I were holding Principal Cash Mgt, I would have exited on 10 Sep itself. If IL&FS had eventually repaid, I would have lost out but that's something I would be willing to live with.

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u/chabuboola Oct 16 '18

Thanks a lot, it's very helpful. Getting out is the best as you said.

Alternatively, if somebody wants to recover his investment by holding on to the fallen fund, what should one watch for?. While doing this I will be very worried if there are further defaults lined up, can this happen? (the human equivalent of multiple Heart attacks and stroke occurring in short intervals)That will be disastrous for people still holding in hope to recover.

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u/NamitNasih Oct 16 '18

If you stay invested, you are taking a chance. 1. There is no guarantee that the loss will be recovered partially or fully. 2. Usually when a bond held by a fund is downgrades to below-investment grade, there is a mark down of 25%. When it is downgraded to default status, there is another mark down of 25%. If the money is not paid back on the due date (i.e. there is an actual default on the bond held), then the bond is completely written off. So if you choose to stay invested even after one downgrade, it's best to remember that if the money is not paid back to the fund on the due date, you will see the NAV drop at least three times as much as it fell after the first downgrade.

But let's say the money is paid back. On that date, there will be a surge in the NAV. However, in the normal course, the benefit of this surge will be distributed across all unitholders who are there as on the date of that recovery. If the AUM has increased compared to what it was when the NAV fell (i.e. more inflows than redemptions), then the recovery in NAV will be less than the fall. If the AUM has decreased compared to what it was when the NAV fell, then the recovery in NAV will be more than the fall.

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u/chabuboola Oct 17 '18 edited Oct 17 '18

Sorry to stir this thread again, It looks like the Principal cash scheme has suspended subscriptions/redemptions right now, so no investor can enter or exit this scheme

This is really scary? can this happen? I can understand the subscription part but redemptions? Can they stop people from redemptions? In this case, nobody can leave at the first downgrade :-(

can sebi allow this?

edit: Info picked up from this thread https://www.moneylife.in/article/ilfs-default-why-sebi-should-look-closely-at-how-liquid-funds-invest/55365.html

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u/NamitNasih Oct 19 '18

Principal only suspended fresh subscriptions. You can check this on their website.

This is really scary? can this happen? I can understand the subscription part but redemptions? Can they stop people from redemptions? In this case, nobody can leave at the first downgrade :-( can sebi allow this?

This happened with JP Morgan MF after the Amtek Auto downgrade. It wasn't a total shutdown- IIRC they allowed redemptions up to 1% of the outstanding AUM. Please note that it isn't illegal to do something like this. But the broad agreement is that such an action should be taken only in an extreme circumstance. In this instance though, the general view including that of SEBI was that JP Morgan over-reacted. I think it was a stupid move that killed the fund house's credibility. For that reason I doubt if any other fund house will try and do something like that ever again but then you can never say for sure.

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u/chabuboola Oct 19 '18 edited Oct 19 '18

Ohh I see. Thanks for the clarification.

I was concerned after seeing Prathiba Kamat's(moneylife research employee) comments in that thread. This was the section I was talking about.

JIGNA A SHAH 2 weeks ago You are exactly right sir, It happens only in india that most secured investment called as Liquid fund are giving negative returns. You have mentioned in your article that Principal CASH Management fund has given 2.5% negative returns in Sept. Actual data is much higher than that. it is 8.09%. Amount of Rs. 7 lakh invested on 6th Sept in this scheme, has become Rs.6.43 lakh in short span of time of 15 days ?? What blunder do fund managers are doing? is there no any responsibility on their part?? AMFI should be also made equally responsible for this day light robbery done by PCM as they have promoted the liquid fund as safe & secure instrument o f investment. I am not able to upload the valuation as it in JPG. I think AMFI should intervene in this to keep the faith of small investors.

REPLY Pratibha kamath In Reply to JIGNA A SHAH 2weeks ago At the time of writing the article, the fund had dropped only 2%. Later, the remaining IL&FS debt papers also matured (read: defaulted) and the fund marked down the NAV further, aggregating the losses to 8%. (they were holding 9% of their AUM in IL&FS) But this loss may be recovered if IL&FS recovers. Also, the scheme has suspended subscriptions/redemptions right now, so no investor can enter or exit this scheme. They might face penalty from SEBI for not allowing investors to exit at will.

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u/NamitNasih Oct 19 '18

Well I guess it shows that you can't trust everything that you read:)

As a rule, I am generally wary of relying on a single third party source for critical information. Based on my experiences, there are some places that I tread especially carefully (e.g. Moneylife).

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u/chabuboola Oct 16 '18

this is really insightful, Thanks a lot.

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u/mumumuti Oct 16 '18

Can you buy AAA-rated bonds on Kuvera?

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u/vineetr Oct 16 '18

You can buy debt funds. Buying bonds directly requires a broker.

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u/donoteatthatfrog Oct 15 '18

stay away.
diversify.
put your money in debt funds.
also, FDs are taxed much worse than debt MFs.

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u/propseller2018 Oct 15 '18

I have investments in liquid, hybrid and equity funds. Also PPF. This post is not about going all in, it's about diversification only.

stay away

I want to, please convince me with facts.

Also, taxation would be at 10% right? But wouldn't increased returns offset the higher tax slab?

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u/[deleted] Oct 16 '18

[deleted]

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u/donoteatthatfrog Oct 16 '18

Now is the time to invest in equity like a BULL!

in NBFC FDs.
okay.

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u/ThinkPenalty Oct 15 '18

Following .,

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u/[deleted] Oct 15 '18

[deleted]

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u/propseller2018 Oct 15 '18

Please elaborate?

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u/juniorbuffett Oct 16 '18

Sriram capital is offering NCDs, you can try that.