How to earn more than 8% return from debt investment

Today, many leading banks are offering over 7% per annum (PA) on fixed deposits (FDs) of fixed tenures, as against 5-5.75% about a year ago. Similarly for Corporate FD. And if you’re a senior citizen, age 60 or older, you’re eligible for even better rates. Debt funds of all categories are also giving higher returns than before.

Those looking to invest directly in bonds can tap non-convertible debentures (NCDs) listed on the exchanges. There are a few NCDs rated AA or above that are trading at Yield-to-Maturity (YTM) of 8.16-8.88%. YTM is the annualized return you will get if you hold the bond till maturity. However, lack of sufficient trading volume may prove to be a hindrance in buying/selling bonds.

Despite higher rates, if you want to build a fixed income portfolio that yields 8%, pre-tax, be prepared to take on some risk – credit risk or interest rate risk – or give up liquidity (any ease) -time clearance). Unless you are a senior citizen (above 60 years of age), in which case, the government-backed Senior Citizen Savings Scheme (SCSS) that offers 8% per annum can be your best bet. can invest up to 30 lakh in SCSS after the investment limit is hiked in Budget 2023. The interest is paid quarterly and the scheme is eligible for deduction under section 80C of the Income Tax Act. The only limitation is the lock-in of five years. Premature withdrawal attracts penalty.

(Graphic: Mint)

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(Graphic: Mint)

Fixed deposit

For people below 60 years of age, the best FD rate you can get among scheduled commercial banks is 8% per annum, ie, if you are willing to invest in FDs of banks with financial health at par with the best in the banking industry . As a senior citizen, you can get 8.5% p.a. For example, Bandhan Bank’s 600-day (1 year, 7 months and 22 days) FD, and Tamil Nadu Mercantile Bank’s 300-day FD – Both offer 8% to non-senior citizens. Senior citizens get 8.5% on them.

Among small finance banks (SFBs), Unity SFB offers the highest rate of 9% to non-senior citizens (9.5% of senior citizens) on their 1001-day (2.7 years) deposits. The bank offers the next best rate of 8.75% to non-senior citizens on their deposits of 181-201 days and 501 days (1.37 years). Senior citizens get 9.25% on these deposits. In terms of interest rates, next in line come SFBs such as Sunrise SFB, Fincare SFB and Equitas SFB, which offer their customers 8% or more on FDs of specific tenures.

FD Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cover of all commercial and co-operative banks including SBFs up to Rs. 5 lakhs. This limit is applicable at the level of each account holder and provides some degree of protection to bank depositors. After amendment in DICGC Act in 2021, customers of any failed bank are entitled to receive their money (up to Rs 5 lakh) lying with the bank within 90 days of the lender being placed under moratorium, and for this they have to wait You don’t have to. until the bank is liquidated.

Apart from banks, companies and non-banking financial companies (NBFCs) also offer FDs. However, these corporate FDs are not backed by the insurance cover of DICGC – this makes them riskier than bank FDs. In corporate FDs, Shriram Finance offers rates ranging from 8.0% to 8.45% to non-senior citizens on its 30, 36, 42, 48 and 60 months non-cumulative FDs with annual pay-out option. In cumulative FDs (where interest is paid along with the principal on maturity), 60 months and 48 months FDs from Shriram Finance can fetch you 8.13% and 7.95% interest, respectively.

All these FDs are rated AA+ (Stable) by ICRA and AA+/Stable by India Ratings & Research – one notch below AAA which indicates the highest degree of safety. Senior citizens get an additional 0.50% on all these FDs, i.e. rates ranging from 8.45 to 8.95%. Women depositors get another 0.10%. That is, the highest rate a senior citizen woman depositor can get from Shriram Finance is 9.05%.

With Bajaj Finance’s AAA-rated corporate FD, a popular option, senior citizens can get the best rates at 8.10% on 44-month and 7.95% on 33-month FDs (both cumulative and non-cumulative) respectively. Rates are as low as 8% for non-seniors.

Graphic: Mint

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Graphic: Mint

Listed NCD

For those who are more risk averse – Credit risk reflected in a credit rating below AAA, and interest rate risk reflected in volatility in NCD (bond) prices with changes in interest rates – NCDs listed on stock exchanges provide another investment opportunity. , But be prepared to hold the NCD till its maturity, given the lack of sufficient trading volume. In fact, holding an NCD till maturity – when the principal amount is returned to you – will protect you from any fall in bond prices in the interim due to rising interest rates.

According to HDFC Securities’ Weekly Retail NCD Reckoner, which compiles a list of the most liquid NCDs in the secondary market, M&M Financial Services’ AAA-rated NCDs with a residual maturity of 3.28 years have a YTM of 8.16% and Shriram Transport Finance Company’s AA + provides The NCD offers a YTM of 8.88% with a residual maturity of 5.38 years. However, the latter has a much smaller trading volume (see table).

Interest income from both FD and NCD is taxed at your relevant income tax slab rate. This makes them tax-inefficient for those in higher tax brackets. Further, capital gains from NCDs, if any, are taxed at your income tax slab rate if short-term, and 10% without indexation, if long-term. For capital gains to be considered long term, the holding period must exceed 12 months.

In fact, on taxation, debt funds score higher than both FDs and NCDs. If you stay invested in debt funds for three years or more, your returns (long term capital gains) are taxed at 20% with indexation benefit. This can reduce your tax liability to a great extent. However, short-term capital gains are taxed at your income tax slab rate.

debt fund

Given the prevailing yields, a high-risk way to make 8% or more in the debt fund space is by investing in credit risk funds. As the name suggests, credit risk funds have credit risk, that is, the risk of default by the issuers of the underlying debt securities held by the fund. Such a fund should invest at least 65% of its corpus in papers rated AA and below. In addition, depending on their tenure, these funds also carry interest rate risk – the longer the tenure of the fund, the greater the impact of interest rate changes on the fund NAV and returns.

The YTM of several credit risk funds such as ICICI Prudential Mutual Fund and Aditya Birla Sun Life Mutual Fund was close to 8.0% (after expenses) at the end of January. While YTM may not be an accurate return metric for open-ended funds that buy and sell securities, it does provide some indication of potential returns.

Unlike FD interest income, debt fund returns are linked to the market, though the latter scores better on taxation. If you are looking for a low risk debt portfolio, then credit risk funds are not for you.

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