Investors prefer inflation-beating secured NCDs over low yielding fixed income instruments

Investors with low risk appetite/tolerance and looking for financial products blending inflation beating steady returns with higher safety are lapping up secured non-convertible debentures (Secured NCDs) from leading financial companies, while ditching other fixed income products like bank fixed deposits (FDs) and corporate fixed deposits, if the current trend is an indication.

Secured NCDs are turning out to be a sure shot hits with retail investors as they look for balancing safety of their investments with reasonable returns in real terms, analysts and fund managers say. This makes it sensible to retail investors as good investment sense especially in debt market in a high inflation-low interest rate scenario, they say.

“Secured NCDs of financial corporates have seen good-to-heavy demand from retail investors in the past few quarters. The trend has become a new normal for the market as investors tend to balance security with inflation beating returns. The demand for Secured NCD spiked after a spate of debt defaults and downgrades hit the investor sentiments post credit defaults by IL&FS and DHFL”, said a portfolio manager with a Mumbai-based investment bank.

Secured NCDs refer to the quality debt papers issued by strong corporates and are backed by the assets of the company. In the event of the company failing to pay up its liabilities on time, investors can recover their dues by liquidating the company’s assets.

“Though the coupon rates on Secured NCDs are lower compared to non-secured NCDs and CFDs, they give a minimum spread of 100 bps (basis points or 1/100th of a percentage point) over other competing products in the market. From an investor’s point of view, even in the base case scenario of 8%-8.5% coupon rate, these papers return inflation beating returns”, said Jatin Chopra, a fund manager at a foreign brokerage house.

Firms also realized the importance of combining safety with reasonable returns while dishing out debt papers to raise money from the market. There is a steady supply of Secured NCDs since financial corporates hit the market on a regular basis to raise capital. All four companies which have filed their final prospectus with regulator Sebi since January 2020 have styled their issues as secured NCDs. “This is enough to lend credence to the rising tide of Secured NCDs since both the issuer and the buyer recognize the importance of balancing safety with inflation beating returns”, said one of the persons cited above.

According to the analysts, investors have started taking a balanced view on where to park their money while getting reasonable returns on their capital. They (investors) are looking for safe instruments though returns are lower compared to non-secured products with higher credit ratings. This is moving the needle for Secured NCDs.


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