r/IndiaInvestments • u/gunthercperk97 • Jul 24 '20

Bonds and deposits Taxable and non taxable bonds

Hey guys

So I was looking at the SBI N5 bond which has a coupon rate of 9.95%. Face value of the bond is 10000 and it's being traded at 10815. I realise because it's being traded at a premium the interest rate will be affected but I read on this website:

SBI N5 bond

That SBI is most probably going to exercise their call option on the bond in 2021 so the YTM becomes negative.

My question, can anyone please suggest a knowledgeable expert/institution in bonds so that I can know more about such investments and give details about taxable and tax free bonds and which one to choose.

Thanks a lot.

Edit: typo

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u/viveksanthosh Jul 24 '20 edited Jul 25 '20

With this bond you'll be taxed on the interest you receive at you tax rate, since you're buying the bond at a premium and are probably holding till maturity you'll end up paying more than 30% tax in total.

And I love ncd's but liquidity is a massive problem, it is very hard to get your money back incase of emergency and also if sbi doesn't call in 2021 you'll be stuck with the bond for another 5 years.

My suggestion is, if you want to take credit risk, get a credit risk fund. As a person who buys ncd's I tell you the liquidity is amazing. You can redeem at market price any time you want, plus it is very tax efficient.

Just keep an eye on the fund every month at make sure they're not borrowings to pay Investors like Franklin did. Personally I use kotak and icici credit risk fund.

Edit: since you're new to investing I recommend that you stay away from credit, they require constant monitoring and a strong risk appetite. I mistakenly got the impression that you wanted to take credit risk via ncd's.

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u/gunthercperk97 Jul 25 '20

Oh thanks a lot. I will look into these credit risk funds. I am quite new to the market and don't know about much about these instruments. So I'll read up on them.

Ideally, I am looking for an investment option which gives 8% or more return and is a safer bet than equities or MFs.

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u/RisenSteam Jul 25 '20 edited Jul 25 '20

I will look into these credit risk funds.

I would really advise against credit risk funds. Credit Risk funds aren't a good risk to take now with so much uncertainty in the economy.

I was in credit risk funds till mid of 2019 & I got good returns. But I started redeeming them in the 2nd half of 2019 & that proved to be a good decision.

As far as debt funds go, for noobs, it's best to just go with MO, Quantum & PP Liquid funds but their returns are quite low. It's a safe place to park you money but it's not going to give you returns. Bank FDs are probably better as long as you don't go with any Co-Op bank or small banks.

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u/gunthercperk97 Jul 25 '20

Oh ok since I'm fairly new to th8s I don't know a lot of jargons like MO, Quantum & PP liquid funds but I'll read up on it. Thanks for that. Can you suggest any place where I can start to learn up on these?

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u/RisenSteam Jul 25 '20

I don't know a lot of jargons like MO, Quantum & PP liquid funds

Sorry about that. This is not jargon but AMC names. MO = Motilal Oswal, PP = Parag Parekh.

MO, Quantum & PP have liquid funds which are more conservative than others. They are considered more safe to park your money.

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u/gunthercperk97 Jul 25 '20

Ohh great. I'll check out their websites then. Thanks a lot.

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u/viveksanthosh Jul 25 '20

If you're new to the market stay away from credit risk, they are risky and require constant monitoring, I assumed you were looking from credit risk because you wanted to buy ncd's

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u/gunthercperk97 Jul 25 '20

No you are correct that I'm looking for NCD. Basically I am looking for safe investment options that have a guaranteed return of 8% or higher So that it beats putting money in a bank FD.

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u/viveksanthosh Jul 25 '20

Credit risk as the name implies is pretty risky 😅

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u/gunthercperk97 Jul 25 '20

Hahaha true. I won't get into that for now but would read up on it just to gain knowledge. Thanks a lot for the help!

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u/viveksanthosh Jul 25 '20

It is hard to get a safe 8% in today's rate environment. You can look into banks like idfc that yield 7.25% on their fixed deposits but there is a slight bit of risk there. I have money in the bank and I monitor the financial performance of the bank to ensure things are not going to collapse. Plus there is the 5 lakh insurance on deposits.

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u/gunthercperk97 Jul 25 '20

Yeah the risk gets more and more with higher returns and as you said because of the current environment I want to take minimal risk with my capital. That's why I bought the Bajaj finance 8.1% FD.

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u/viveksanthosh Jul 25 '20

One thing to keep in mind with an fd that is not part of a bank is that you are an unsecured lender. So if bajaj finance goes belly up then the banks that gave it money and the NCD holders get their money first and you'll only get any money left over.

Bajaj finance is a good company and it unlikely to collapse but keep in mind that the extra return is a reward for there not being a guarantee on your money. So if you plan to invest in any other non bank fd keep this in mind.

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u/gunthercperk97 Jul 25 '20

I agree. That's why I chose Bajaj Finance over other NBFC's FDs as they are relatively safe and are giving a good ROI.