Category: Personal Finance

Government may look at AMC or ARC model for asset monetisation programme, BFSI News, ET BFSI

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The government may consider asset management and asset reconstruction company model to monetise non-core assets of public sector enterprises (PSEs).

AMC and ARC or a bad bank has been proposed for the banking sector in Budget 2021-22 to acquire, manage and turnaround bad loans. The budget also talked about asset monetisation to unlock the true value of the assets lying with the government entities.

The plan now is to create a special purpose vehicle (SPV) under the government route that could take the shape of an AMC/ARC and help maximise the value of the assets of the PSEs.

Assets may first be transfer to the proposed SPV which will then devise a plan to improve them before finding a strategic buyer and completing the transaction.

Speaking to IANS earlier, DIPAM secretary Tuhin Kanta Pandey had said that the SPV could look at monetising non-core assets of PSEs that are unable to undertake the work on their own and help them realise better value for assets that are unutilised or underutilised or are just lying idle without generating any revenue.

Asset monetisation is the process of creating new sources of revenue for the government and its entities by unlocking the economic value of unutilised or underutilised public assets. A public asset can be any property owned by a public body, roads, airports, railways, stations, pipelines, mobile towers, transmission lines etc. or even land that remains unutilised.

The DIPAM secretary said that while the contours of the asset monetisation SPV is still to be worked out, it has asked all government bodies and PSEs to identify a list of assets that need to be monetised. These would then be transferred to the SPV that will help improving the assets so as to maximise its value in the monetisation exercise.

With regard to land to be under monetisation, the plan is to create a central portal that could act as a land bank housing information about all such assets that have been lined up for utilisation by the strategic investors.

Sources said the AMC/ARC model for asset monetisation would work as it can help in maximising the value of public assets, thereby give better returns to the government and the PSEs. Certain assets may need to be improved before putting them up for auction. This work can be taken up by the AMC which can then put the asset up for sale and complete the transaction.

Pandey said that only non-core assets may be taken over by the proposed SPV and it would basically support smaller PSEs or those with inadequate infrastructure to undertake monetisation on their own. Larger entities like the Railways or other PSEs can continue on their own to monetise assets.

The Railways already has the Rail Land Development Authority (RLDA) for creating assets for Indian Railways through the development of vacant railway land for commercial use to generate revenue using non-tariff measures.

Though asset monetisation in bits has been undertaken in the past and few PSEs have initiated the exercise on this front, the government has given importance to this plan this year in the Budget and is actively looking to create a vast pool of state assets that would be sold off.



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LIC HFL “HomY App”: Now Apply for Home Loan from your Mobile

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Planning

oi-Sneha Kulkarni

|

Yes, now individuals can apply for a home loan easily from LIC Housing Finance Limited’s mobile app called “Homy”. LIC HFL provides a wide range of home loans that will meet your needs at one of the lowest interest rates available.

Their home loans are tailor-made to meet all forms of a consumer base, salaried, self-employed, professional, NRIs, etc. LIC offers Low home loan interest rate starting from 6.90% p.a.

With the app, one can confirm their eligibility for a pre-approved home loan based on KYC and other details. The software can also be used by LIC Housing Finance agents in the sector to communicate with clients and deliver services in real-time.

LIC HFL

LIC HFL HomY app facilitates:

Download the app and get instant loan deals depending on your eligibility, set your period of repayment, upload records, and submit the loan application. Track your loan application and download your pre-filled application and EMI calculator.

LIC HFL Home Loan Features on Mobile:

• Apply for Home Loans Online

• Check the latest rate of interest

• Get loan offers based on your income and property cost

• Calculate Eligibility and EMI

• Set repayment duration

• Upload documents

• Submit loan application

• Track your application status

• Chatbot to answer all your queries

Maximum loan amount

The maximum loan amount will be 90% of property value for a loan up to Rs 30 lakh

The maximum loan amount will be 80% of property value for a loan more than Rs 30 lakh and up to Rs 75 lakh

The maximum loan amount will be 75% of property value for a loan above Rs 75 lakh.

Maximum repayment period

The maximum repayment period for a salaried individual is up to 30 years

The maximum repayment period for self-employed is up to 20 years.

Documents required for LIC home loan:

KYC documents:

  • Pan Card
  • Aadhaar Card
  • For NRIs, passport is required
  • Proof of residence
  • Income documents:
  • Salary slips and Form No.16 for salaried
  • Last 3 years income tax returns along with financials for self-employed or professionals
  • Bank statements for the last 6 to12 months
  • Property Documents (in case property is identified):
  • Proof of ownership of property
  • In the case of flats, the allotment letter of the builder/society
  • Up to date tax paid receipt.

Types of Home Loan

Home Loan for Resident Indian

Home Loan for Non-Resident Indian

Pradhan Mantri Awas Yojana

Home Improvement Loans

Top-Up Loan

Plot Loans

Griha Varishtha – Home Loan for Pensioners

LIC Home Loan Customer Care

You can contact LIC home loan-related questions and grievances via phone, email, and post.

LIC Housing Loan Customer Care Number of LIC HFL Corporate Office: 912222178600

LIC Housing Loan Customer Care Email ID

Email ID of LIC HFL: lichousing@lichousing.com

For Customer Grievance: customersupport@lichousing.com

GoodReturns.in



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‘Barring payment aggregators & merchants from storing card data to impact card payments’, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) in March 2020 had put out Payment Aggregator and Payment guidelines that bars the merchants from storing card data of customers and disallows payment aggregators from storing customer card credentials within their database or the servers assessed by the merchant. PAs and merchants will have to most likely adhere to these guidelines by June 30, 2021

According to payment industry experts and executives that ETBFSI spoke to, this could potentially impact digital payments, particularly the card transactions. Further there are three key concerns viz. systemic risk due to technology build up, one size fits all approach, and customer inconvenience.

One-Size-Fits-All Approach
Globally, payment companies and merchants storing card data have to be compliant with Payment Card Industry Data Security Standard (PCI-DSS). PCI-DSS is a set of requirements for all companies who process, store or transmit credit card information having to maintain a secure environment.

In that context the RBI in the PAPG Guidelines holds payment aggregators responsible to check PCI-DSS compliance of the infrastructure of merchants onboarded but doesn’t allow the merchants to save customer card and related data.

Experts believe this is a one-size-fits-all approach and will impact customer inconvenience.

“It makes the card payment experience worse for customers and it’s a step not in the right direction. In India we should encourage as many instruments as possible as the digitisation journey has just started. Somebody preferring a credit card shall be offered the same level of experience as somebody using UPI. In this case cards would’ve a terrible experience than any other instrument,” said a CEO of a large Payment Aggregator, on condition of anonymity.

He added, “Even today, first time digital payment consumers still use debit cards, because UPI requires a bit of understanding, onboarding, etc. Making that experience patchy and bad might not be in the right direction to encourage digital payments, because we can’t expect the consumer to every time add the sixteen digits of the card number and other details especially for recurring transactions.”

While PCI-DSS is a recognised standard world over across different jurisdiction, experts suggest if the RBI’s intention is to prevent data breach and leakage of card data, the regulator can add more things like data localisation and other measures with audits but doing away with it and one-size-fits-all wouldn’t make sense.

Mandar Kagade, Founder & Principal at Black Dot Public Policy Advisors said, “The restriction is broad-based and makes no distinction as to the merchants that have invested in the relevant PCI – DSS standards and the ones that haven’t. It applies a one-size-fits-all constraint to all merchants regardless of whether they are compliant of PCI- DSS and is thus inconsistent with RBI’s recognition of it hitherto.”

Mandar added, “Consistency in the regulatory voice is critical for the growth of the payments sector because payments sector participants and FinTechs will invest in technology relying on that consistency.”

Mandar suggests that payments sector participants that are PCI- DSS compliant should be allowed to continue to store card data “in-situ” and others that are not compliant, may be given a time window to on- ramp and upgrade.

According to Ashish Agarwal, Senior Director and Head – Public Policy at NASSCOM, it’s also a case to look at the applicability of the guidelines on international transactions.

Ashish said, “While it is one thing to make the PAPG guidelines applicable in case of domestic transactions, mandating them on international transactions has left the industry a bit puzzled. How will this be mandated with foreign merchants and foreign acquiring banks is not clear. Already consumers can control use of their cards for international as well as e-commerce transactions. So we want RBI to evaluate the application of this on cross border transactions a bit more and clarify how this is planned to be implemented.”

The Case of Tokenisation
If the regulator doesn’t allow the merchants and payment aggregators to store the data on their server, tokenisation could be a way forward. Tokenisation is replacement of card details with an alternate code called “token” which is unique for a combination of card, token requestor and device. In a tokenised transaction the actual card details are not shared with the merchant during transaction processing and the transaction is processed based on the tokens.

Experts believe the industry isn’t ready to roll out full scale tokenisation as there are some limitations at ecosystem level. Currently the RBI has restricted the feature of tokenisation to mobile phones and tablets only.

The CEO of payments aggregator quoted above said, “Tokenisation is not adopted by the industry well, the purpose of tokenisation solves the purpose of not sending card details every-time to the network. But the issuing banks haven’t widely adopted so it’s not widely used.”

To increase the adoption of tokenisation the RBI will have to broaden the applicability to other devices like computer/laptop as well apart from mobile phone and tablets.

Ashish of NASSCOM added, “RBI will have to time the implementation of tokenisation to the ecosystem – we are talking about networks, banks, payment aggregators and merchants. Merchants can’t afford even a small window of disruption and they will be completely dependent on the payments infrastructure. As per our understanding, a minimum of six additional months are needed. The June deadline for PAP guidelines is not looking reasonable. Two things are needed – RBI needs to work with the industry for smooth roll out of tokenisation at scale and only after that the new PAPG should be enforced.”

Ashish also suggests that e-mandate on debit and credit cards, PAP guidelines and tokenisation are all deeply interconnected and without card on file at the end of merchants and PAs, e-mandates can be effectively implemented only through large scale tokenisation at the end of networks and banks, and with PAs maintaining the requisite infrastructure to connect all ecosystem players including merchants, banks and networks, in order to seamlessly transmit unique and merchant-specific tokens. Currently, however, PAs are not geared for that. RBI has set March 31 as the deadline for e-mandate and that needs to be tied into the overall tokenisation rollout plan.

Financial Fragility & Systemic Risk
The restriction on storage of customer cards and related data could make the payments ecosystem systemically fragile as merchants and PAs will be constrained to call the Application Programming Interface (API) of the bank to authenticate the consumer every time for execution of the transaction.

Mandar added, “Significant build- up of technology debt at any one of the banks thus exposes the payments ecosystem to significant systemic failure risk albeit at a low probability, the very definition of ‘grey swan/ black swan’. The concentrated nature of the bank market amplifies this “grey swan / black swan risk.”



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50/50 Investment strategy: Best Strategy For Long-term Investment

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Investment

oi-Sunil Fernandes

|

Indian stock market and its various indices are witnessing some unprecedented bull runs but this also crops up a catch-22 situation in investors’ mind – whether to put extra money or hold it for time till some correction happens and share bazaar becomes stable? This is a very natural question since whenever there is such all-time highs are witnessed, it poses a risk of losing money as well.

Now, just remember the time – March 2020 and some months after it – when the lockdown was put in place in the wake of Covid-19 pandemic to contain the coronavirus spread. At that time too, stock markets were witnessing new lows every day but investors were struggling with a huge dilemma that whether to put extra money or not since as an investor one always wait for another low level so that he/she can reap hefty returns once the market bounces back.

Now, as a stock market investor, what should you do in such share bazaar scenarios of all-time highs and all-time lows and the positions in between the bull runs and bear runs?

Investors should follow the 50/50 investment strategy of American economist Benjamin Graham. So, what is this 50/50 investment strategy? How does it work? What are its benefits?

As per this formula, investors should invest 50% of their money in the equity market and 50% in the debt market, and balance it from time to time.

For example, if an investor wants to pumps in Rs 1,000 in total in the stock market, then he or she should invest Rs 500 in Debt and Rs 500 in equity.

After a particular time period, there could be two scenarios – One – your investment in debt grows to Rs 510 vs original Rs 500, and your investment in equity becomes Rs 530 vs original Rs 500. Now, your total investment value stands at Rs 1040. Further, to balance the debt vis-a-vis equity ratio of 50:50, as per the investment strategy, you have to withdraw Rs 10 from equity and invest it into debt to make it again a balanced with 50/50 investment strategy.

Now, let’s focus on the second scenario. Let’s assume if you get negative returns from equity or even lesser returns from the money you had put in debt; for instance, -4% returns have been fetched from equity investment and your total market value of funds in equity stands at Rs 480. In this case, , you have to withdraw Rs 15 from debt and invest in the equity market; this will make Rs 495 in both equity and debt, and that’s what our ideal approach was of 50:50 debt vs equity investment. An investor should always review his/her portfolio from time to time to reap best returns from the market with the help of the balanced approach of 50:50 investment strategy.

50/50 Investment strategy: Best Strategy For Long-term Investment

Moreover, let’s take a look at benefits 50:50 investment strategy. Majorly, there are 3 benefits of the 50/50 formula.

First of all, your investment portfolio always remains balanced because your 50% investment is in the debt market.

Second, when the equity market is at the top levels or witnessing new highs, your portfolio helps you fetch more returns. And, using this strategy you a get a peace of mind by booking some part of the profit from equity’s investment lot and divert some funds towards debt investment in order to balance portfolio as per 50:50 investment approach. This strategy gives you of bigger chance to reap profits and helps you save money by no losing all profits, in case market slumps down to lows from highs.

Third, last but not the least, when the equity market is bearish, then using this 50:50 investment strategy you may always withdraw funds from debt and divert it to equity at cheaper levels. And, ultimately, using this strategy you buy equity at a low level and sell at a high level for booking big profits in future.

Various market investors use different ratios depending upon their risk appetite, but 50:50 debt vis-a-vis equity is the best ratio if you are new to the market or beginner in terms of share bazaar. Once you gain knowledge, you can change this ratio with your stock market’s bull and bear experiences.

Authored by Ravi Singhal, Vice Chairman of GCL Securities



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Know the nuances of booking profit in bull market

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As the stock indices soar past previous life-highs, many retail investors seem to be deciding that enough is enough and booking profits on equity funds, as AMFI data show. It is certainly a sign of maturity that in a buoyant market, instead of letting greed take over and pour more money into equity funds, investors are looking to protect the returns they’ve already made.

But while not being greedy in a bull market is important, it is also critical not to jeopardize your long-term wealth creation plans through attempts at market timing. So, here are three factors to keep in mind if you’re booking profits on equity funds.

Premature exit

Selling equity funds at market highs and re-entering them when it bottoms may be the textbook way to maximise returns. But in real life very few investors are blessed with the sense of perfect timing that can help practice this. Even professional investors who’ve spent decades in markets struggle to identify market tops and bottoms while living through them. So, one of the biggest risks you take when you sell equity funds in a rising market is to exit too early and miss out on further upside.

The current bull market has been a good lesson that taking a purely quantitative approach to identifying a market top can backfire. In the past, based on empirical data on the Nifty50’s official PE ratio, dynamic allocation funds used to deem markets expensive when the Nifty’s PE ratio crossed 22 and think of it as cheap when it fell below 15.

But this indicator has proved a big red herring in the current bull market. Investors, who booked equity profits in February 2015 when the Nifty PE first crossed the 22 mark, would be quite bitter today as they’ve missed out on a 76 per cent Nifty upside since then. A combination of valuation, liquidity and behavioural metrics now appear to be a better gauge. Therefore, even if you’re convinced that the stock market is a bubble waiting to burst, make allowances for your predictions turning out to be wrong. Hold on to a minimum equity allocation at all times and book profits only on your excess holdings over and above it.

Low returns

No matter how disciplined you are, getting to a double-digit return on your equity fund portfolio is no easy task. Many investors who’ve persisted with the SIP route to equity funds in the past decade or so, still have only single-digit CAGR (compound annual growth rate) to show for it.

It is in the nature of the stock markets to frustrate you with two-way moves for years only to deliver big gains in a sudden burst spanning a few weeks. Rushing to book profits after on a short-term up-move can deprive you of the opportunity to make up for all the uncertainty you’ve endured over the years.

If booking profits on your funds, do it on the basis of long-term portfolio returns you’ve achieved and not absolute gains in the last six months or year. For investors who bought diversified equity funds in January 2008, CAGR returns on diversified equity funds even after this stellar rally average only about 9 per cent.

Delayed deployment

Jumping off the ship when markets are looking frothy is actually the easy part of market timing. The tougher part comes when you need to decide when to re-deploy that money.

Assuming that you’ve been investing in equity funds with specific long-term goals in mind, investing your equity profits into bank FDs or debt funds simply isn’t going to get you to your goals.

If you exit your equity funds because markets are expensive today, it will also be up to you to identify when they are cheap enough to invest again. Many savvy investors who exited smartly at market highs in January 2020 admit that they managed to re-deploy only a little of that at March lows. After a 30 per cent correction, they feared that the correction wasn’t over. In India, market rebounds from bear phases tend to be both swift and sharp, offering very little time for you to select stocks or funds to buy.

Given the above factors, when should you be certain about booking profits on your equity funds? Consider it in these situations.

Goals within three years: If the money you have parked in equity funds is for a goal that is likely to come up within the next 3-4 years, it is best to book profits on your funds today. Should a correction materialise, you’ll not have the time to wait out the bear phase and recoup your capital.

Past cycles show that when stock prices crash, a complete recovery from a bear phase takes 4-5 years.

Overshooting planned allocation: If you are working to a fixed asset allocation plan based on your risk profile and investing horizon, don’t hesitate to book profits on your equity funds to rebalance your portfolio, when allocations overshoot.

Wrong style or mandate: If you invested in funds that are ill-suited to your risk profile or long-term goals on an impulse, this is a good time to exit and switch into investments better suited to you.

NFOs, thematic or sector funds that you acquired in the spur of the moment may be particularly good candidates for profit-booking today.

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Financial planning for a family of 4

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Sankaran (42) and his wife Revathi (39), parents of 2 children, work in the IT industry. They want a financial plan to achieve their goals in future. They had prioritised their key goals as follows.

1. Education fund for kids, aged 9 and 4.

2. House at the earliest, preferably a 3-BHK in Chennai at a cost of ₹1.2 crore

3. Investing for retirement

4. New car at an additional cost of ₹8 lakh in 2022

5. Protection of family from unfortunate events

The family’s cash flow and assets are as follows:

 

All the investments in real estate were made based on third party compulsion in the last 4 to 5 years. They had not seen their assets appreciate considerably. They had sought unit-linked insurance policies on the assumption that they were investing in mutual funds. They had started to invest in mutual funds two to three years ago. With home loan interest rates at attractive levels and surplus cash available in hand, the couple wanted to buy a house.

Sankaran did not exhibit confidence of getting any substantial increase in his salary in the coming years. Revathi was comfortable continuing with her employment.

 

We reviewed their investments and recommended the following.

a) Build up ₹ 6 lakh towards an emergency fund

b) Set up protection by buying term insurance for Sankaran for a sum assured of ₹1 crore and Revathi for ₹1 crore without riders.

c) Buying health insurance for the family for a sum insured of ₹10 lakh. Though the family is covered for medical emergencies through employer-provided group insurance, these covers had many restrictions along with low sum insured. The health cover was also insufficient considering their life style

d) Keep track of spending for the next one year to ascertain their actual monthly expenses. The expenses may have come down because of the Covid lockdown and that they could go back to their old spending habits once life returned to normal.

e) Restructure their holdings in unit-linked insurance plans within the next one year, mainly to reduce the annual commitment. This would reduce the premium commitments from ₹ 6 lakh per annum to ₹1 lakh per annum

f) Sell two of their plots of land to partially fund the house purchase, so that their leverage could be restricted and an unproductive asset monetised. This would help them to buy a house for ₹1.2 crore while also restricting the loan component to ₹60-70 lakh.

With adequate contingency measures in place, reduced premium commitments and surplus available as cash, they were better placed to service the housing loan without additional financial burden. They were also advised to reduce expenses wherever possible to foreclose the loan in the next 8 to 10 years.

Education goal

Towards elder son’s education, they would require about ₹35 lakh in the next nine years. They would also require ₹57 lakh for the younger son’s education. (Current cost for education is presumed at ₹15 lakh with inflation assumed at 10 per cent).

At 11 per cent expected return, they would need to invest ₹14,000 and ₹16,000 per month in large-cap mutual funds to fund these two education goals.

Retirement goal

We recommended that they invest ₹25,000 in large-cap mutual funds towards their retirement corpus. With an expected return of 11 per cent over the next 20 years, they would be able to achieve a corpus of ₹2.16 crore. Along with regular PF and NPS accumulations that they were making, they should be able to reach a sizeable corpus towards retirement.

Other facets

To become successful investors, we encouraged them to keep an ‘Investing Behaviour Journal’ to keep a record of their emotions as and when there were wild swings in the markets either up or down.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

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How to save tax on superannuation fund proceeds

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I have filed an application for withdrawal of 100 per cent accumulation of SAF (Superannuation Fund) maintained by former employer with LIC for the past 27.5 years. Approximately, the amount is ₹17 lakh as on April 1, 2020. I am entitled for 100 per cent withdrawal of the SAF accumulation, subject to TDS. I am using this amount to repay the education loan borrowed for my daughters’ overseas education. What is the best way to optimise income tax on SAF amount received? What is the TDS amount to be paid? Already, interest paid on above loan is used for tax-saving for the past three years.

N Seshasaye

As per section 10(13) of the Income-tax Act, 1961, the lump sum payment received, in lieu of, or in commutation of annuity, from an approved superannuation fund shall be considered as exempt in the hands of the employee, if received under the following circumstances:

i) on retirement; or ii) after attaining a specified age; or

iii) on becoming incapacitated before retirement.

The above exemption shall be available if the subject fund is an approved superannuation fund as per the provisions of Part B of the Fourth Schedule of the Act.

Thus, if the superannuation amount to be received by you satisfies the above conditions (subject to any other specific condition as may be prescribed by tax authorities while providing approval to your employer’s SAF fund), such payment shall be exempt. If the above conditions are not satisfied, then such payment shall be considered as taxable under the head ‘Income from Other Sources’.

Further, as per the provisions of Rule 6 of Part B of the Fourth Schedule, payment from superannuation fund is received by an employee during his lifetime under circumstances other than those referred to in Section 10(13), tax on such payment shall be deducted at the average rate of tax at which the employee was liable to tax during the preceding three years.

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Readers’ Feedback – The Hindu BusinessLine

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The below two comments are with respect to the article titled ‘Smart finance, spicy romance’ published on February 14.

Financial compatibility is as critical as emotional bonding, for couples.

Knowing each other’s financial knowledge and investments, and aligning for a longer-term, sustainable and stable relationship is the key.

––Bal Govind

Very pragmatic approach to Valentine’s Day. Well done, Keerthi Sanagasetti (writer).

––Rasika Ranganathan

Thanks for the prompt response to my email query about the IPO recommendation on RailTel. I read the article in BusinessLine dated Feburary 18.

It will be really helpful if the analysis can be published a day prior to the opening of the IPO.

––Chetan.

BusinessLine Research Bureau says: We strive to always publish the IPO recommendation in advance or on the opening day.

Apologies for the delay this time around. It was due to some unavoidable circumstances.

Thanks for the faith in our product. Keep reading!

This is with respect to the article ‘Why you should accumulate the stock of Prestige Estates’ published on February 14. First of all, the Bengaluru-based firm’s fortunes depend on that city alone. Secondly, it is highly unlikely that companies will bring people back to work from office. So, how will demand, which is driven solely by software workers, improve?

The recommendation is not rational.

––Krish

BLRB says: While the company is based out of Bengaluru, the upside is not based on IT companies alone. There are other factors, too, that help — favourable property prices and low housing loan interest rates.

Also, despite work-from-home, many players in the office segment have been reporting steady occupancy and collections since March 2020.

Also, if the Blackstone-Prestige Estates deal goes through, it will help Prestige bring down its debt, giving room for expansion.

So, at this point, one can consider betting on the stock.

Please publish recommendations on mediclaim policies.

––Debjyoti

BLRB says: Thank you. We do regularly publish reviews of new health insurance products and feature stories on issues concerning health insurance. Keep reading!

I have been a regular reader of online BL since the Covid lockdown. I would like to know how to invest in foreign equities, and about the rules and regulations, including income-tax implications.

––Suresh Kumar PT

BLRB says: We have written on these aspects in the article ‘How to invest in US Equities’ (tinyurl.com/USEquities).

As a reader of BusinessLine for more than a decade, I’d like to wish BL on introducing your Sunday edition.

As a retail investor and a bank depositor, I, like many others, face a lot of challenges — be it logging to net banking, syncing up with Google Pay, or bank linkage for SIPs.

I request BL to act as a bridge, and solicit such challenges, suggestions and feedback/solutions from its readers.

You can evaluate and publish selected best entries in your Sunday edition. This can be a regular weekly column. This can get attention of relevant industry leaders. Readers will also feel connected to BL.

—Srivatsan

BLRB says: Thank you for your wishes and suggestion. We will surely consider such an interactive column in the future.

Excellent performance on your recommendations and advice. I love ‘Who Am I?’. Super quizzing!

––Vikesh Wallia

I am happy to read the Sunday BL paper and also see the pictures of writers alongside their names.

––Shanmukhappa Ankamanal

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Yield to maturity – The Hindu BusinessLine

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A coffee time chat between two colleagues leads to an interesting explainer on bond market jargons.

Vina: Do you think I should try my luck with the bond markets?

Tina: While stock and bond market prices are unpredictable, don’t leave your investment decisions entirely to a game of luck.

Vina: Agreed! Today while bank deposit rates are at all-time lows, I came across a bond that promises a yield to maturity of around 8.8 per cent. Interest of ₹88 on a bond with a face value of ₹1000, sounds like a great deal. Doesn’t it?

Tina: No, that’s not how it works, Vina. You are mistaking the yield to maturity for the coupon rate. The two are not the same.

Vina: Jargons again! What is the interest I will earn?

Tina: The coupon rate when multiplied by the face value of a bond, gives you the the interest income that you will earn. Yield to maturity is a totally different concept.

Vina: Enlighten me with your wisdom, will you?

Tina: When you buy a bond in the secondary market, its yield will matter more to you than the coupon rate or the interest rate that it offers on face value. Because the yield on a bond is calculated with respect to current market price – which is now the purchase price for you.

The current yield is the return you get (interest income) by purchasing a bond at its current market price. Say, a bond trades at ₹900 (face value of ₹1,000) and pays a coupon of 7 per cent per annum. Your current yield then is 7.8 per cent.

Vina: What is the YTM then?

Tina: The yield to maturity (YTM) captures the effective return that you are likely to earn on a bond if you hold it until maturity. That is, the return you get over the life of the bond after accounting for —interest payments and the maturity price of the bond versus its purchase price.

The YTM for a bond purchased at face value and held till maturity will hence be the same as its coupon rate.

Vina: Hold until maturity? The bond I was referring to has 8 years left until maturity. Too long a tenure, right?

Tina: Yes! The bond whose YTM is 8.8 per cent and has a residual maturity of eight years must be paying you a coupon of 7 per cent annually. That isn’t too high when compared to what other corporates have to offer.

Vina: So, should I now look for bonds that offer even higher YTMs?

Tina: Don’t fall prey to high yields, Vina. A high deviation from the market rate often signifies a higher level of risk. Higher YTMs are a result of a sharp drop in the current bond market price, which is most likely factoring in perceived risk of default or rating downgrades.

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How good is G-Sec as an investment option

Personal Finance

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There has been much buzz around investing in Government securities (G-secs) ever since the RBI Governor proposed to allow retail investors to invest in them through the central bank . As of now, you can invest in G-secs via broking firms such as ICICI Securities, HDFC Securities and Zerodha and NSE’s goBID platform.

While direct investing may make it easier , this alone may not be enough to nudge retail investors to jump in.

Not completely risk-free

No risk of default by the Government makes G-secs immune to credit risk. But they are exposed to interest-rate risk, just like other tradeable bonds. When interest rates rise, or expected to rise (fall), G-sec prices can fall (rise) leading to a capital loss (gain).

You must be prepared to see the value of your investment in G-secs going down if interest rates start to pick up. This will, however, be only a mark-to-market loss (and will not be a realised loss) unless you sell the G-secs. So, if you hold them until maturity, you can avoid the capital loss, if any.

Understanding yield

The RBI conducts auctions of G-secs (Government-dated securities with original maturity of one year or more) where institutional investors can place competitive bids for them, and retail investors can apply for allotment. Retail investors must invest a minimum of ₹10,000 and are allotted G-secs at the weighted average price arrived at, in the competitive bidding process. G-secs pay half-yearly interest (coupon), calculated on face value.

Let’s take RBI’s auction conducted on February 18as an example. The ‘5.15% Government Stock 2025’ refers to a batch of G-secs paying 5.15 per cent coupon rate per annum (paid half-yearly) and maturing in 2025. The weighted average price for these G-secs arrived at the auction was ₹ 98.18. That is, the bond price is ₹981.8, and on maturity, the face value of ₹1,000 will be paid.

If an investor holds the bond till maturity, then his return will be indicated by the YTM (yield to maturity) which accounts for not only the coupon payments but also the purchase price of the bond. In our example, the YTM is around 5.59 per cent. Since the bond was issued at a discount to face value (₹981.8 versus ₹1,000), the YTM is higher than the coupon rate.

Another recently auctioned G-sec, ‘5.85% Government Stock 2030’ is offering a YTM of only around 6.06 per cent. Also, as with other bonds, once the G-secs get listed, then as their prices change, so will their YTMs (from what they were in the auction).

Not always attractive

Today, based on data from the RBI auctions (primary market) and the already listed Government bonds (trading in the secondary market), we can see that G-secs yields (YTMs) are quite low. There are other fixed-income options that can offer you a better deal.

For example, based on aggregated data from the secondary market, three-year G-secs are offering a yield of 4.88 per cent. Compared to this, public sector banks are offering 4.9 to 5.5 per cent per annum on their three-year fixed deposits. Private sector bank FDs too will fetch you better rates. Three-year post-office deposits, which carry no risk of default, are offering 5.5 per cent per annum.

Similarly, five-year G-secs are offering a yield of 5.69 per cent. The equally safe five-year post-office deposits and Senior Citizen Savings Scheme (the latter usually for those 60 and above) are offering a higher 6.7 per cent and 7.4 per cent, respectively.

Unlike G-secs, bank fixed deposits and small savings schemes (post-office time deposits and senior citizen savings scheme, to name a few) come with a few years’ minimum lock-in period. However, given the lack of liquidity in G-secs in the secondary market, the absence of a minimum lock-in period can hardly be considered an advantage. Also, interest (coupons) income from G-secs is taxed at an individual’s income tax slab rate as is the case with the interest income (paid out or accumulated) from the other options mentioned here.

Don’t lock into low yields

If one were to look at longer periods, here too, a yield of 6.67 per cent pre-tax (and lower once you apply the relevant tax slab rate) on 15-year G-secs is less attractive than the tax-free 7.1 per cent offered by Public Provident Fund (PPF). But you can invest only up to 1.5 lakh a year in PPF.

It is likewise for other G-secs too. For instance, the 6.52 per cent yield (January-end 2021) on 30-year G-secs is well below its 10-year average of 7.82 per cent. By investing in such long-term G-secs today and staying put until maturity, investors will lose out on a better long-term return, once rates start moving up. Hence, timing is important when you invest for holding until maturity.

“The government and the RBI need to create liquidity for retail investors to enable premature exit,” says Deepak Jasani, Head of Retail Research, HDFC Securities. According to him, this can be done by promoting market making in them, at least initially. Also, a window for premature encashment at the prevailing yields, subject to a maximum of the face value, can be offered.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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