Muthoottu Mini Financiers NCD offers 10.47% yield; should you invest?

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Muthoottu Mini Financiers has announced the public issue of secured and unsecured redeemable Non-Convertible Debentures (NCDs) with an effective annual yield ranging from 8.75 % to 10.41 %. The issue opened on August 18, 2021 and closes on September 9, 2021 with a minimum application of Rs 10,000 and Rs1,000 thereafter. There are seven series of NCDs carrying fixed coupons having tenure of 480 days, 24 months, 42 months, 50 months, 66 months and 84 months with monthly and cumulative interest rate options.

The face value of NCD is Rs 1,000 each, with a base issue size of Rs 125 crore, with an option to retain over-subscription up to Rs 125 crore. The UPI mechanism is also applicable making it easier to apply for the issue.

Muthoottu Mini Financiers is an NBFC company and is involved in the gold loan business. Apart from the gold loan business, Muthoottu Mini offers services relating to insurance, money transfer and wealth management. It has a network of more than 800 branches and more than 3000 employees.

NCDs generally offer higher rates than fixed deposits because of the higher risk they carry. Moreover, unsecured options offer a higher rate of interest than secured ones, as at the time of liquidation secured NCDs get an advantage over unsecured ones. The share of secured NCD and unsecured NDC is up to Rs200 crore and Rs50 crore in the ongoing Muthootu NCD.

Credit Rating:  It has got the rating of ‘CARE BBB+’: Stable (Triple B Plus; Outlook: Stable’) by CARE Ratings Limited (“CARE Ratings”)

Funds Deployment: The 75% of issue proceeds are to be used for the purpose of onward lending, financing, and for repayment/prepayment of principal and interest on borrowings of the company and the rest 25% is to be used for general corporate purposes.

Liquidity: These bonds are tradeable on BSE but generally NCDs are low on liquidity score. FDs have much higher liquidity compared to NCDs.

Taxability: The tax treatment is similar to debt funds. If sold within one year then short term capital gain tax is levied according to the tax slab you fall into. If sold after a year, 10 % long term capital gain tax is levied without indexation.

What to do? Small investors should be aware of the risks involved before investing in NCDs. Moreover, high tax bracket investors should consider post-tax returns before swaying by the high-interest rates.