Rajiv Bajaj, Vice Chairman & MD of Bajaj Capital believes that investors are now looking at safe capital protective returns. Therefore, fixed income products and tax-free bonds saw a phenomenal response last year. However, the first tranche of such investments closing on March 15 got a lukewarm response in the current year.
Also read: See 25bps rate cut; bond yields may trough at 7%: Deutsche
He advises investors to opt for issues from institutions that are offering good returns at the moment. People are nowadays more inclined towards locking in money for a period of three to five years. But, it is best to invest in long term bonds, only when the investor can give 10 to 15 years, he opined.
"If you have 10 to 15 year's money to spare, that is when you should come into these bonds and this could be one of the major reasons why people are not coming into these bonds in a hoard. The current mindset of fixed income minded investors is they want to wait and watch, they want to lock-in money for ideally three years, maximum for five years and that is why you see mutual funds and the capital protection side ballooning, growing very fast," explained Bajaj.
Here is the edited transcript of the interview on CNBC-TV18.
Q: We did not see much too much investor enthusiasm even at 7.8 to 7.7 percent tax exempted returns. How do you think investors should behave, what explains that lack of enthusiasm?
A: As we know that we are in a fixed income era and investors are looking at safe capital protective return. If one sees the response one is getting to all fixed income product and tax-free bonds, there was a phenomenal response last year. This year in the first tranche the response was lukewarm and in this current tranche where many issues are closing on March 15, the response is even cooler.
I believe fixed income minded investors have a certain benchmark return in their mind and they get put off if the return falls below that. So, most of these tax-free bonds are offering tax-free returns in the range of 6.8 to 7.5 percent depending upon what rating, what bond you buy. In that case the pre tax comes to just above 10 percent with Housing and Urban Development Corporation Limited (HUDCO) being the best for a 15 year tenure, offering close to 11 percent pre tax yield.
My theory is that whenever a pre tax return of a tax-free bond comes below ten percent, the investor begins to lose enthusiasm. So, even in the first tranche last month in January, money was still flowing in because the return was above 10 percent. Investors now have options. They can even get 9 to 9.5 percent from bank deposits today. I am referring to retail investors, people putting in up to Rs 10 lakh. If you are an institutional investor, with a high networth, your return is even 0.5 percent lower than what I mentioned.
Q: There are nine issues in the market currently; some of them are from first timers like Jawaharlal Nehru Port Trust (JNPT) or National Housing Bank (NHB). Do you have preference that you would recommend to retail investors? How do you choose?
A: These are all high pedigree institutions. If one were to look at finer details, HUDCO at AA+ is as solid an institution as any other and if they offer up to 7.69 percent for a 15 year tenure, that comes to 11 percent pre tax. So, that stands out.
NHB on the other hand is offering lower interest because the prices of these bonds are set on the basis of two weeks preceding government securities (Gsec) yield. Maybe they got stuck at a wrong time and hence, they are offering 20 bps lower than other institutions.
Therefore, investors should go for institutions which are offering good returns. Otherwise, Ennore Port is offering higher yield on ten year option and all the other institutions, whether it is Rural Electrification Corporation (REC), Indian Railway Finance Corporation (IRFC), Power Finance Corporation (PFC), India Infrastructure Finance Company (IIFCL) are offering similar returns.
Q: If someone enters into these and wishes to exit perhaps in two-three years before the maturity of 10-15 years gets over, they will be listed on the exchange but when you wish to exit at the exchange, does someone lose out on the yield due to illiquidity and if yes, how much would be the yield that you lose out?
A: Not that there is much activity on the secondary market on these bonds but, I did check that last year people who bought the bond got about 4 percent appreciation of capital. This is a kind of a bonus for them but, the volume traded would not be much.
Hence, it is a theoretical comfort which investors have. My view would be clear, if you have 10 to 15 year's money to spare, that is when you should come into these bonds and this could be one of the major reasons why people are not coming into these bonds in a hoard.
The current mindset of fixed income minded investors is they want to wait and watch, they want to lock-in money for ideally three years, maximum for five years and that is why you see mutual funds and the capital protection side ballooning, growing very fast. It has already become Rs 10,000 to Rs 15,000 crore market.
Q: What explains this lack of interest? Is it higher inflation for the last few years?
A: Inflation is one of the important factors but, inflation is also an investor's friend because whenever inflation is high, you start getting higher returns. So, what investors need to look at is what is the alpha you are getting on top of inflation. Retail investors in particular are not enthused if you offer them 0.5 percent over inflation and they are very happy if you offer them anything above 1-1.5 percent over inflation and they are delighted if they get 2-2.5 percent real return.
No comments:
Post a Comment