Retail investors keen to switch to preference shares and tax-free bonds as FD rates fall
Financial advisors have always complained that the Indian investor depends too much on bank deposits for his savings because of their presumed safety and compound interests. But the slide in deposit rates may change this forever.
Retail investors are gradually moving to instruments such as preference shares and tax-free bonds, which in the past, did not go down too well with them. Rates offered are in the range of 7.40-8.25% compared with 7-7.5% offered by bank term deposits.
"With falling deposit rates, a section of the retail investors are now keen to invest in instruments like redeemable preference shares, tax-free bonds, rather than open bank FDs," said Vikram Dalal, managing director, Synergee Capital Services. "An investor can always look at branded company preference shares like Tata Capital, L and T Finance."
"Given the long-term interest rate outlook in India, it may be prudent to invest a portion of the investible funds in such securities," he said. The preference shares offer a fixed dividend rate till maturity. Tata Capital, L&T Finance Holding, Infrastructure Leasing & Financial Services (IL and FS) now offer dividend rates in the range of 8.33-9.40% with about 5-7 year maturities, which are tax-free.
Most retail investors remain unaware of primary issuances as they are placed privately, but they can buy them from the secondary market through stock exchanges or any off-market transaction from local financial institutions.
However, such debt investment comes with two caveats: any change in tax laws and the issuing company's performance.