NRI – My Money Streets

GOLD ETF thrives on high liquidity, can be converted into physical on 1 kg of gold, NRIs can invest too
SGB offers interest on investment and capital gain tax exempted on redemption

Gold has been one of the oldest currency/ investment instrument world-wide. It is used widely as currency hedge, hedge against #inflation, and safe heven during various economic or political crisis. In India #Gold has a very special place. It is a popular investment choice among Indian households. However, the mode of investment is Jewellery and it is an emotional choice on rather than a well thought out investment choice, it is mostly bought as a wedding gift for the bride as “Stri Dhan” as it is referred.

There are many theories on the ideal exposure on this asset class, but no-one can deny that a portion of wealth should be kept in Gold, may vary from 10-20% of total portfolio, as its price tends to increase with the rise in the cost of living.

Jewellery, coins and bars – Asset with emotions attached

Though the asset class is important, investing in this has been a high-cost and difficult one. In Jewellery and gold bars, there many concerns like safety and storage, purity concerns and difficulty in trading. It also attract high taxation. It comes at a premium adding making charges in the range of 8 -25%, it my further vary depending on the seller.

GOLD ETF – Buy any day/ sell any day/ keep as long as you want

Last decade has seen a gradual but major shift in investors’ taste, with Mutual Fund companies offering GOLD ETFs and Gold FoF (Fund of Funds). GOLD ETFs are nothing but open-ended funds that trade on a stock exchange just like equity shares. Gold ETFs can be bought anytime like equity shares, can be bought anytime with minimum investment of 1 unit. Gold FOFs are predominantly used for SIP facility (monthly recurring investment) investing in Gold ETFs to accumulate Gold over a period of time. This is stored in dematerialised format, so no fear of theft or storage concerns. Though it comes under long term/short term taxation depending on the investment horizon, it doesn’t have any wealth tax attached. This is the most liquid form of Gold investment.

NRIs can Invest in Gold ETF through trough exchanges with registered PINS account.

Gold Sovereign Bonds – Only form which pays interest

There is a new entrant in the market for investing in Gold, Sovereign Gold Bonds. Introduced in H2, 2015, bonds are issued by RBI in tranches on behalf of Government of India.

Sovereign Gold Bond Scheme, is an alternative instrument for holding Gold. Investors can simply apply through designated Banks/ PO/ NBFC and NSE brokers for investing in the SGB scheme in Paper/ Demat format. n a paper form through Sovereign Gold Bond Scheme. The under-lying asset for these bonds is Gold. These bonds will track the price of gold. The bonds also offer 2.75% interest income on the initial investment amount paid semi-annually to the investors. Minimum investment amount is equivalent to 1 gm of physical gold.

The minimum tenor of the bonds are 8 years however, there is exit options in 5^th, 6^th and 7^thyear and it has a fixed tenor. The bonds are tradable in stock exchanges for those who holds the bonds in demat format. It doesn’t attract any capital gain taxes on redemption, however, interest pay out and early exit attract taxes as per long term/ short term gains.

Though the investment format is good, liquidity is low with exit option after 5 years with fixed tenor for maturity and the liquidity on exchange transaction remains to be seen.

So far in One year, Government of India has mobilised investment worth 2,292 crore Rs in four tranches in series I. Data shows no. of applications for the fourth tranche increased to 1.95 lakh from 62,169 in the first tranche. Despite these advantages, investors must note that liquidity in secondary market for sovereign gold bonds is yet to be seen.

The table intends to illustrate various aspects on the investment instruments.

View: Neutral NCD issue review

DHFL NCD Issue opens on Aug 3, 2016, closes on August 16, 2016

Should or should not buy? What to look at? Is it safe? Will it give high returns? What are the risk involved?

About the company – #DHFL, is a deposit-taking housing finance company registered with the NHB and focused on providing financing products for the #LMI (Lower Middle Income) segment in India primarily in Tier II and Tier III cities and towns since 1984. They are known for providing secured finance primarily to individuals, partnership firms and companies for the purchase, self-construction, improvement and extension of homes, new and resalable flats, commercial properties and land. They also provide certain categories of non-housing loans including loans for commercial property, medical equipment, and for plant and machinery.

About the issue

DHFL, NCD issue opens on August 3, 2016, a public issue of secured redeemable #Non-Convertible Debentures (“NCD”) of face value of Rs. 1,000 each aggregating up to Rs. 4,000 crore. The Issue is scheduled to close on August 16, 2016, with an option of early closure or extension as decided by the Board of Directors of our Company (“Board”) or the Finance Committee.

The NCDs received the highest credit rating ‘CARE AAA (Triple A)’ by Credit Analysis and Research Limited (“CARE”) BWR AAA (Pronounced as BWR Triple A) by Brickwork Ratings India Private Limited (“Brickwork”). The rating of CARE AAA by CARE and BWR AAA, Outlook: Stable by Brickwork indicates that instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations signifying the instrument carries lowest credit risk.

· The minimum application amount is Rs. 10,000 collectively across all options on NCDs and in multiples of One (1) NCD after the minimum application. Maximum limit of a retail investor is Rs. 10 lakh.

· Allotment is on a first-come-first-serve basis (except on the date of oversubscription, if any, when all the investors applying on the said date will get allotment on a proportionate basis).

· Investors have an option to apply for NCDs in dematerialized as well as physical form

· Category IV Investors (Retail Individual Investors) are defined as Resident Indian individuals and HUFs allowing investment upto 10 lakh

· Investors can apply through ASBA, the NCDs are available both in physical and Demat format

Issue Structure

The issue is divided into 10 series depending on the tenure of the series and coupon payment. And divided into 4 categories – category I, II, III, IV.

Interest on Application Money is at 8.00% p.a. and Interest on Refunded Money is at 6.00% p.a
Tenure of the NCDs are 3, 5 and 10
Coupon payment options – monthly, quarterly and annually
The interest payout metho includes NEFT, RTGS, Direct debit
Floor rate on interest rate for all categories is 8.90% and cap on interest rate for all categories is 9.50%.
Series X is a Consumer Price Index (CPI) linked instrument (Floating Rate Instrument) has a tenor of 3 years and the Coupon Rate for Category I & II investors is currently 9.10% (Reference CPI + 4.08%); and that for Category III and Category IV investors is currently 9.20% (Reference CPI + 4.18%). 12 month average for the period before the record date (currently at 5.02%; Source http://mospi.nic.in.

Allotment is first come first served basis

Issue size and allocation

QIB: Rs. 800 Crore

Corp: Rs. Rs. 800 Crore

HNI: Rs. 1200 crore

Individual: 1200 crore

Total : 4000 crore

Interest rate:

For individuals

9.20% p.a for 3 years

9.25% p.a for 5 years

9.30% p.a for 10 years

For Non-individual

9.10% p.a for 3 years

9.10% p.a for 5 years

9.10% p.a for 10 years

#NRI investors cannot invest in this issue

My Take – #NCDs are being offered by reputed housing finance player, having a minimum investment requirement of Rs. 10, 000. The NCDs are secured, backed by assets, which means incase of default/ non-payment, assets can be liquidated to repay the debts. Credit rating agencies CARE and BWR has awarded highest credit ratings, suggesting lowest risk involved. So, safety score is high for the principle amount.

Now let us look at the interest rate and coupon payment scenario. The #coupon rate across segment is expected to be just above 1.5- 2 % from any bank FDs at this point of time. Though the dematerialised NCDs don’t attract TDS, the investment will taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor. So, with a high tax bracket investor (20-30%) won’t be benefited much, as the return will be almost similar to Bank FDs.

However, interest rate movement can be a game changer in this investment. Apart from the coupon payment, capital appreciation on principal is possible incase interest rates soften during the tenure of the NCDs. The interest rate and bond prices move in opposite direction and one can sell it at a profit, instead of holding on till maturity. The scenario exactly can become opposite in case of rising interest environment, the prices of the instrument may fall sometimes even below the face value in some rare cases. For the investors in lower tax bracket, instrument offers higher interest rate than bank with minimum risk, may also enjoy capital appreciation incase interest rates fall.

General Risks –

#DHFL’s Business is particularly vulnerable to volatility in interest rates
Any increase in the levels of non-performing assets in loan portfolio, for any reason whatsoever, would adversely affect the business, results of operations and financial condition
Any downgrade in their credit ratings may increase interest rates for refinancing their outstanding debt, which would increase their financing costs, and adversely affect our future issuances of debt and our ability to borrow on a competitive basis.

Also Read: What is NCD and what makes it so attractive

Category: NRI

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