High net worth individuals, or HNIs, are refraining from putting in fresh money into equities because of uncertain market conditions. Instead, they are taking advantage of the high interest rate scenario by investing in various debt options such as bonds, fixed maturity plans (FMPs), non-convertible debentures (NCDs) and even bank fixed deposits.
HNIs are investing in a combination of bonds such as PSU bonds, company bonds and government bonds. According to wealth managers, bond issues of public sector units such as SBI (returns of up to 9.25%) and Perpetual Bonds of companies such as Tata Motors and Tata Steel (10.5%) have seen a good response.
?Apart from the coupon, investors can get capital appreciation in case interest rates fall. Since these bonds are traded in the bond market they are liquid,? said Anil Rego, CEO & founder of Right Horizons.
According to Yatin Shah, executive director, IIFL Private Wealth Management, HNIs prefer high yielding and tax-free bonds. ?Tax efficient bonds such as Nabard and REC had become popular as the post-tax return in these bonds was about 8% for 8-10 years. PSUs like IRFC and NHAI are lining up public issuances in the tax-free segment next month and could generate a huge interest among HNIs,? he said. With average annual returns of 9.5-10% for 1-3 years, investors have also become comfortable with investing in bank FDs. However, wealth managers are advising investors to invest in FMPs rather than bank FDs because of the post tax benefits given by the former. ?One year rates for bank CDs and CPs are about 9.5-9.75% and 9.75-10.25% respectively, making FMPs attractive from the risk-reward perspective,? said Rupesh Nagda, head of investments & products, Alchemy Capital Management. ?In FMPs you either take the benefit of indexation and pay 20% tax or pay 10% tax without indexation as it qualifies for capital gains.?
HNIs have also been eyeing NCDs that offer returns of anywhere between 10.5% and 11.25%. However, wealth managers advise caution while investing in these instruments. ?One needs to check the credit quality, interest payment terms and post tax returns before deciding on which NCD to apply for,? said Nagda. Rego is wary of NCDs brought out by realty firms: ?Avoid real estate companies as they can come under pressure if there is a liquidity crunch due to their huge capital requirement.? NCDs brought out by real estate players can give pre-tax returns as high as 16-20%.
According to Shah, debt investment entails mark-to-market risks: ?The timing of investment is critical. One must invest when the rates are high and try to book profits when the yields fall.?