Companies offer more fixed income options for retail investors

If you are scouting for safe investment options, here's some good news. The universe of fixed income options, which was restricted mainly to bank deposits for quite some time, is set to expand, with better rates on offer as well.

Tight liquidity conditions are prompting more companies to raise public deposits from retail investors. Mutual fund houses, seeing an opportunity in the current regime of rising interest rates, are rolling out a slew of fixed maturity plans (FMPs). And topping this off, financial institutions such as IDFC, REC and Life Insurance Corporation are preparing to make public offers of 10-year ‘infrastructure' bonds which offer tax benefits.

More FD windows

With their expansion plans taking off again, more Indian companies are tapping the fixed deposit market to raise funds from retail investors. Companies from the realty and infrastructure space with high fund requirements such as Jaypee Infratech, Jaiprakash Associates, Ansal Properties and Unitech have been inviting retail deposits at high interest rates that start from 10-10.5 per cent for one year and go up to 11.50-12.50 per cent for a three year term. Large deposit takers such as Tata Motors, HUDCO, Jaiprakash Associates and Sundaram Finance, in fact, saw a doubling of their fixed deposit outstanding (Rs 8,000 crore) in 2009-10, compared to the preceding year.

Mr Anil Chopra, Group CEO for Bajaj Capital, explains: “Fixed deposits help companies manage liquidity and working capital requirements. It is relatively simpler than borrowing from banks and is unsecured. More companies are tapping the fixed deposit route; however, not all are blue-chip companies.”

Traditional deposit-takers such as Fenner India, Wheels India and Sundaram Industries, too, have re-opened deposit windows, offering more moderate rates of 7.5-8 per cent for 1-3 years.

FMPs popular again

Another debt category that is seeing a lot of action is FMPs – closed end debt funds that invest in short term instruments such as commercial paper, bank certificates of deposit and company bonds for fixed terms of 3 months to one year. Mutual funds have mopped up Rs 14,600 crore through 60 such launches since June.

Attractive yields of 7-8 per cent on short term debt, tax efficiency and top-notch credit quality are the reasons why FMPs are proving popular with affluent retail investors who have surpluses to park, says fund managers.

“In the last three months, since June, yields on three-month paper have gone up from about 4.50 per cent to nearly 7 per cent. Yields on one-year paper have gone up from about 6 per cent to 8 per cent. The hike in repo and reverse repo rates and the fact that we have moved from a surplus to a deficit liquidity situation, has attracted investors to FMPs”, says Mr Dhawal Dalal, Senior Vice-President and Head- Fixed Income, DSP BlackRock Mutual Fund.

Mr R. Sivakumar, Head of Fixed Income at Axis Mutual Fund, points out that investors who seek predictability with diversification come to FMPs.

“FMPs offer better post-tax yields than bank deposits. They also allow you to invest in a diversified pool of corporate issuers rather than just one issuer. The other factor is that the kind of companies that have access to the bond or commercial paper markets are very different in credit quality from the ones that borrow in the deposit market; the former are typically rated AAA or P1+”.

Infrastructure bonds

Then, for investors who would like to take advantage of additional tax exemptions (up to Rs 20,000) under section 80CCF of the Income-Tax act, there is the new breed of infrastructure bonds. IDFC has plans to raise over Rs 3,400 crore through its 10-year infrastructure bond issue which opened last week. The bonds offer a coupon rate of 8 per cent with a 10-year lock in period. For investors who would like a ‘buyback' option after five years, the interest rate would be 7.5 per cent.

Source: http://www.thehindubusinessline.com/2010/10/04/stories/2010100451830100.htm