Best picks: NCDs of top-rated finance companies beat bank returns

As interest rates on bank fixed deposits drop, the hunt among investors is for alternatives that are safe andoffer better rates. One such option is non-convertible debentures (NCDs) of AAA-rated finance companies thatare traded on the stock exchanges. While a fixed deposit by SBI fetches 5.3%, some of these NCDs could return 7-9%if held to maturity. Many high net worth investors (HNIs) like these NCDs because taxes on this instrument held inthe demat form are not deducted at source. But investors should be careful about the quality of the NCD issuer. Also,these instruments are not highly traded on the exchanges. ET takes a look at four NCDs that have been recommendedby investment advisors. Tata Capital Housing FinanceCoupon payable every year: 8.4%Yield to maturity: 7.61%CMP: Rs 1,080These NCDs, which were issued in January 2020 and have a tenure of eight years, offer a coupon of 8.4%. As smaller NBFCs in the housing finance space struggle due to a deteriorating environment on account of Covid, investors have higher confidence in this Tata Group companyL&T Financial ServicesCoupon payable every year: 8.65%Yield to maturity: 7.98%CMP: Rs 1,083Issued in December 2019, this 7-year NCD pays a coupon of 8.65% every year. Analysts say there are worries about the developer loan book at L&T Finance, but its diversified book and strong parentage are positives. The NCDs are secured.Tata Capital Financial ServicesCoupon payable every year: 8.65%Yield to maturity (YTM): 7.80%CMP: Rs 1,116Financial planners recommend NCDs of this company because of the Tata Group backing and stronger balance sheetcompared to its peers. The issue was launched in August 2019 and the instrument will mature in August 2027. Whatgives comfort to investors about these NCDs is that they are secured.Mahindra & Mahindra Financial ServicesCoupon payable every year: 9%Yield to maturity: 7.62%CMP: Rs 1,068This 10-year NCD, which was launched in June 2016 with a coupon of 9%, has a residual tenure of six years. Financialplanners point out that these NCDs are unsecured, which means the assets are not backed up for principal and interest. But, the backing of a strong parent — M&M — should give enough comfort to investors.

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