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Safety first

L&T Finance is offering a non-convertible debenture designed for conservative investors

Close on the heels of the Shriram Transport Finance Company’s non-convertible debenture (NCD) issue comes yet another NCD offering, this time from Larsen & Toubro Finance (L&T Finance).

L&T Finance plans to raise Rs 500 crore through its NCD issue with an option to retain another Rs 500 crore in case of over-subscription. The issue, which opened on August 18, closes on September 4.

L&T Finance, which is a subsidiary of L&T, is in the business of providing finance for the purchase of commercial vehicles, tractors and construction equipment. It plans to use the money raised from the NCD issue to expand its business. The issue is rated AA+ by CARE and LAA+ by ICRA. This means that the credit risk is low.

“It’s not a bad option for someone who wants a fixed income for the next five to 10 years. L&T is a company that one can absolutely trust and it’s also a debenture issue, which means the debt is securitised against certain assets,” says Kartik Jhaveri, director, Transcend Consulting India.

L&T Finance though is offering a lower interest rate on its NCDs compared to the 11 per cent to 11.5 per cent interest offered by Shriram Transport Finance on its five-year NCDs. “But then the rate depends on the company and its credit rating,” says Jhaveri.

Investors can choose from four options under the L&T Finance NCD issue. The minimum investment is Rs 10,000 and each NCD has a face value of Rs 1,000.

Now, if you want to invest your money for five years, you could consider Option I or II. Option I offers an interest rate of 9.51 per cent per annum. The interest is paid out quarterly so the effective yield is 9.85 per cent.

Option II is also a five-year NCD with an interest rate of 9.62 per cent. Here, the interest is paid out half-yearly so the effective yield is again 9.85 per cent.

If you don’t need a regular income and are willing to invest your money for 88 months or seven years four months, consider Option III. This cumulative NCD carries an interest rate of 9.95 per cent per annum, which is compounded annually. The principal and interest is paid on redemption. In other words, the payout on each Rs 1,000 face value NCD will be Rs 2,005 on redemption.

The post office’s Kisan Vikas Patra scheme doubles your money in eight years seven months.

Option IV meanwhile is a 10-year NCD with an interest rate of 10.24 per cent per annum. The interest is paid our half-yearly and the effective yield is 10.5 per cent.

Interest earned on NCDs is typically added to an investor’s income and the tax is levied at the applicable rate. But no tax is deducted at source.

Here’s a thought though. Would you get a higher return in the long term if you invested in a blue-chip stock like the parent, L&T, instead of investing in the L&T Finance NCD? Says Jhaveri: “That’s a trade-off investors have to take between risk and safety. If someone is a conservative investor and wants safety, the NCD would be attractive.”

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