Q. I am a 59-year-old retiree. I need your guidance on investing in NCDs that offer a higher interest compared with FDs.

A. If you have never invested in NCDs before, you need to do some due diligence and learning before entering the debt market.

NCDs offer higher rates than bank fixed deposits (FDs). But that is only because they are riskier instruments than bank FDs.

Here are some facts you need to know before you invest in one: NCDs do carry credit rating but as seen in the past two years, credit rating can become totally irrelevant suddenly when rating agencies are caught unawares in a brewing credit issue. Hence, it has become necessary for investors to read the offer document (for a primary issue) or know the financials of a company well before you choose NCDs.

An NCD need not always be secured by a collateral and even if it is, the charge on the collateral could be subordinate, which means your claim will be entertained only after other creditors’.

Put and call options

Some NCDs have put or call options. A call option allows the company to prematurely redeem the NCD and a put option similarly allows you to make an early exit from the bond. This may mean the time frame of the NCD is not the same as what is mentioned as ‘tenure.’ Many investors think that if NCDs are held in demat form, the interest is not taxable because there is no TDS.

This is not correct. They are taxable at your income tax slab rate. Generally, it is better not to go for long- tenure NCDs (over five years or sometimes even perpetual) as the ratings may change and a bond may turn out to be poorer in credit worthiness.

If such a bond has low liquidity in the secondary market, you may be stuck with it.

A final word on NCDs: when you buy them in the secondary market it is important to understand whether you are buying at the right price because only the market price at which you enter determines the yield. We are now in a low-interest scenario. That means bonds have already rallied quite a bit. Buying NCDs in the secondary market now, without knowing the interest rate risk, may result in capital losses for even a year or two if your price is unfavourable.

If all this seems too much for you, please stick to RBI Floating Rate Bonds, Senior Citizens’ Savings Scheme and Pradhan Mantri Vaya Vandhana Yojana.

Q. I am 57 years old. Until now, I have had no specific investments for retirement, except for a few fixed asset investments. I want to retire next year. So, please suggest ways to invest for regular, lifelong pension. Also, how much should I invest?

A. It may be hard for you to enter any wealth-building asset classes such as equities now, given that you don’t have much time. It is best for you to reduce your exposure to fixed assets and liquidate them. Use the proceeds to invest in options such as Post Office Senior Citizens’ Scheme (at the age of 60), RBI Floating Rate bonds and perhaps options such as LIC’s Jeevan Akshay VII – which is an immediate annuity plan. The final settlement from your job may also be used to park in LIC’s Vaya Vandhana Yojana (at 60), if the plan continues then.

Use bank deposits and savings accounts to park short-term emergency money. Your idea should be to build a portfolio of liquid investments that are safe and one that you can draw from, for emergencies, besides a high-quality secure portfolio that generates regular income for you.

(The author is co-founder, Primeinvestor.in)

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