Non Convertible Debentures (NCD): A source of passive income 💰

PFC NCD advertisement (Source: ToI newspaper)

Power Finance Corp (PFC) a govt of India undertaking advertised that it is selling bonds also called non-convertible debentures (NCD) worth Rs. 5000 cr to raise cash. The maximum interest rate offered on these bonds is 7.15% pa. This is an eye catching rate of interest as the bank FD rates have fallen sharply below 6%. The offer start date was 15 Jan and end date is 29 Jan. Would you consider investing ?

Let’s look and the interest/coupon rates and bond tenures a little more closely. I am considering only the options available to retail investors; the matrix differs for HNI and institutional investors.

Retail investor options (Source: HDFC Securities)

The 7.15% interest rate is for a term of 15 years. You have to lock in your cash for 15 years ! You get 7% for 10 years; but if you are looking for regular income, there is the quarterly payout option at a slightly lower interest rates. Sounds good.

But not everyone thinks so. Some people are of the opinion that the current low interest rate regime will soon reverse and in a few years, we will be back once again to days of 8% bank FD rates and hence locking the cash for 15 years at 7.15% is a loss. And if you are considering the 3 or 5 years bond tenure, the current bank FD rates can match the offered interest rates.

There is also a floating rate option for a tenure of 10 years.; but this has a floor rate (minimum) 6% and cap rate (maximum) 7.5%.

So again would you invest ? I would, for a regular passive income. It could be one of the passive income sources. The equity market is at a lifetime high of 49k. It is always good to categorise equity investments into short-term and long term. The short term investments, if they have done well, a portion of it can be sold and the money put into the NCD for a regular income. But this income is taxable. These NCDs will be listed on the on exchange and can be sold before maturity.

I cannot predict how long the interest rates will remain soft or when the rate cycle will reverse; so will make use of the opportunity available at present to tap into an additional source of passive income via the NCDs.

Till next post, take care !!

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