Muthoot Finance - Public Issue - 13.25% Secured Non Convertible Debentures - Avoid Subscribing

Investors should give a miss to the new Non Convertible Debenture (NCD) issue from Muthoot Finance.
These debentures are available in 4 options, with varying maturity and yield.
The following table shows the NCD options that are available

Options	I	II	III	IV
Frequency of Interest Payment	Annual	Annual	Annual	Cumulative
Face Value of NCDs(Rs.  / NCD)	Rs. 1,000	Rs. 1,000	Rs. 1,000	Rs. 1,000
Issue Price (Rs.  / NCD)	Rs. 1,000	Rs. 1,000	Rs. 1,000	Rs. 1,000
Effective Yield (% per annum)	13	13.25	13.25	13.43
Tenor	24 months	36 months	60 months	66 months

The debenture rating is AA- from CRISIL and ICRA, implying that these debentures can be considered as having high degree of safety and low default risk.
Here we are not doing fundamental analysis whether the firm is doing well or not and whether we should invest on the basis of the financial strength of Muthoot Finance.

Here we are comparing this issue with the already available NCD issues from Muthoot having the same credit rating.
You can see that the following NCDs are listed on NSE and are available for investment through your broker.
I am giving the link of Edelweiss along with the security, you can visit Edelweiss website for the detailed information on maturity, coupon payment frequency and other details. There are in total of 6 issues from Muthoot trading on NSE, but the problem is that these instruments (aprart from N6) are not liquid.

1. MUTHOOTFIN-N6 - around 5 yrs to maturity (roughly 4 yrs 9 months) and yielding 14.36%, on an average around 1400 NCDs are traded daily
2. MUTHOOTFIN-N4 -  around 3 yrs to maturity (roughly 2 yrs 9 months) and yielding 14.18%, on an average around 50+ NCDs are traded daily  
3. MUTHOOTFIN-N2  -  around 2 yrs to maturity (roughly 1 yrs 9 months) and yielding 14.12%, on an average around 200+ NCDs are traded daily 

So, if you can see, on an avearage investors are expecting 14%+ on investment in Muthoot Finance NCDs. The newly issued NCDs are yielding 13% to 13.43%, which is much lower than the market yield.

So, if an investor want to take exposure in these instruments, a better way would be to buy directly from the market.

However, there are some concerns when you buy from the market

• Brokerage Costs
• Liquidity is not good and hence you can see wide bid - ask spread and may not be able to buy at the price which you think is good

Please note that NCDs are not treated like stocks, so the interest accrued is charged at the investor's personal tax rate, also the capital gain is charged at personal tax rate. however there is no Security Transaction Tax (STT) to be paid.

NCDs are good instrument to give you exposure to high yield instruments, but there are some points which you should keep in mind

• Invest for shorter term securities (as the probability of default is more in the long run)
• Spread your investments across many entities - for example you can find NCDs from Manappuram, IIFL, Religare, Tata Capital, Sriram Transport
• These are illiquid and hence in case you require your money urgently, you might suffer loss because you will not be able to sell at the fair price of the security
• Try to get exposure in higher rated instruments
• See the financial ratios of the firm before investing
• These NCDs are typically issued by NBFC (Non Banking Financial Companies) and hence any downtrend in the economy would result in losses to these companies, so do a qualitative analysis before investing
• You are getting higher return to compensate for the default and liquidity risk, invest only if you have appetite for the risk

Disclaimer: NCDs are not risk free investment, there is risk of loss to the capital when you invest in such securities. This article should not be taken as recommendation, please consult your financial advisor/financial planner before doing any investment. Any loss suffered by an individual (non client) owing to the investment in such securities is because of their own decision and Moneyplant Financials doesn't take responsibility for it.