June 11, 2020

(DISCLAIMER: This blog is for information purposes only. Investments in the securities market are subject to market risks. Readers are requested to read all related documents carefully before investing.)

Gold has been one investment avenue that has charmed its investors with its golden returns. If not, during a short period, but surely have on the long term. The government has come out with a new scheme of investing in gold through the Sovereign Gold Bond Scheme. Under this scheme, the Gold Bonds are issued by RBI on behalf of the Government of India.

Who is eligible to invest in SGBs?

Any person who is a resident of India as per the FEMA Act, 1999 is eligible to invest in SGB. Individuals, HUFs, trusts, universities are some of the examples of person.

Risks associated with an investment in SGBs

Gold Bonds are issued in grams as its units. If the market price of the gold declines, there will be a capital loss to its investors. However, the units for which the investor has paid remains unchanged.

Tenure

These Bonds are issued for a period of 8 years and gives exit options from the 5^th year. That is, early redemption of the bond is allowed after the fifth year from the date of issue on coupon payment dates.

Minimum and maximum investment?

The minimum investment in bond shall be of 1 gram and can be stretched up to a maximum limit of 4 kg for individual, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March).   

How the price of Gold Bonds are determined?

The nominal value of Gold Bonds shall be on the basis of a simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited, for the last three business days of the week preceding the subscription period.

What is the return on investment?

SGBs comes with an interest rate of 2.50% per annum. This interest rate is fixed and shall be paid semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal. The interest shall be paid on the initial amount of your investment (i.e. nominal value). Interest shall be taxable as per the Indian Income Tax Act, 1961.

What can one expect on redemption?

On maturity, the market price shall be the redemption price of the SGBs which shall be based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by India Bullion and Jewellers Association Limited. Capital gain tax at the time of redemption of SGBs is exempted.

Who are authorised agencies to sell?

Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents.

How can one apply for it?

You can apply online or offline. However, the advantage of applying online is the issue price of the Gold Bond will be Rs. 50 per gram less than the offline nominal value.

Can SGBs be used as collateral for loans?

Yes! SGBs can be used as collateral for loans. The loan to value ratio will be as applicable to ordinary gold loan prescribed by RBI from time to time. However, the loan sanctioning authority reserves the right to grant the loan.

Forthcoming issues in FY 2020-2021

Conclusion: Gold is an ideal avenue where one can park investment. What makes SGBs lucrative from buying physical gold is it offers 2.50% per annum interest which is an extra return. On the other side, one shall be ready to remain invested for 8 years period.

May 20, 2020

Sensitivity analysis is a finance management term. It enables managers to assess how responsive the Net Present Value is to changes in the variables which are used to calculate it.

Sensitivity analysis answers questions like:

• What happens to the Net Present Value if inflows are, say Rs. 40,000 than the expected Rs.60,000?
• What will happen to NPV if the economic life of the project is only 2 years rather than the expected 5 years?

The importance of sensitivity analysis is it directs the management’s focus towards the factors where the minimum percentage of adverse change causes the maximum adverse effect.

Sensitivity of a variable is calculated by using the following relation :

Sensitivity (%) = (Change / Base) x100

Merits of sensitivity analysis are:

1. It forces management to identify underlying variables and their inter-relationship.
2. Shows how robust or vulnerable a project is to change in underlying variables.

One of the demerit of sensitivity analysis is that the study of the impact of variation in one factor at a time while holding other factors constant. This may not be very meaningful when underlying factors are likely to be inter-related.

How to compute sensitivity analysis?

NPV = C.F. x PVIFA (Kc,n) – I

where, NPV = Net Present Value. C.F. = Cash Inflows. Kc = Cost of capital. I = Investment.

While performing sensitivity analysis of a factor we keep NPV = 0.

This means that whatever will be our MOS (Margin of Safety) or sensitivity (%), it will always keep the project’s NPV at 0. In case if we increase the sensitivity %, our NPV will start getting negative.

Let us understand the above concept by solving a practical problem.

October 17, 2018

What it is?

These are debt instruments issued by the corporate to raise money from the market. NCDs stands for Non Convertible Debentures. By that we mean that these instruments are not convertible into equity. There are  debentures which after a pre-defined time period gets converted into equity shares and gives company’s ownership right to it’s holder. Thus, a holder of NCDs cannot claim itself to be the owner of the company.

What right do i enjoy as NCDs holder?

If you buy these NCDs, you are a bondholder for the company. Your money will be utilized by the company in exchange of coupon / interest rate which will be paid to you periodically (monthly, quarterly, half yearly, annually or even cumulatively). You’ll be paid interest / coupon whether or not the company makes the profit. At the time of liquidation of the company, the company will first discharge its liability before the NCDs holder in comparison to equity shareholders.

How can i choose among the various NCDs issued by different corporate?

Prior to the issue of NCDs, the corporate intending to raise money through NCDs obtain its rating from the credit rating agencies like CRISIL, ICRA, FITCH etc. Generally, NCDs above “AA” rating are considered to be good for investment.

Who can invest in NCDs?

Following are eligible as NCDs investors:-

1.  Individual
2.  Non-Resident Indians (NRIs)
3.  Banking Companies
4.  Primary Dealers
5.  Foreign Institutional Investors
6.  Other corporate bodies registered or incorporated in India and unincorporated bodies.

In what form NCDs are kept?

NCDs may be kept in physical form. However, it is encouraged to be kept in dematerialized form in your demat account.

Can i sell NCDs prior to its maturity?

Yes! you can. NCDs are traded in NSE and BSE and can be sold prior to its maturity and may be subject to buyers availability. You may have to incur capital gain tax in selling it prior to it’s maturity.

What is the tenure of NCDs?

The tenure period or the maturity period varies. As per the RBI guidelines, It cannot be less than 90 days.

What is the return on NCDs?

Albeit NCDs rate vary from each other. Generally, it’s around 8.00 % per annum.

NCDs Vs Bank FDs?

The interest earned through bank FDs is lower than NCDs. Bank FDs are of two types : tax saving and non-tax saving. Tax saving bank FDs gives a return of around 7.00 % and is parked for a minimum 5 years term whereas non-tax saving bank FDs gives a return of around 7.50 % and may be liquidated at any point of time.

Tax point on FDs, Tax Saving FDs and NCDs?

Under Indian Income Tax Law, interest earned through bank FDs (whether tax saving or not) are taxable income. These interest are subject to certain deduction and eligibility (Section 80 TTB). Comparably, interest earned through NCDs are neither an exempt income nor can one claim for its deduction.

However, bank’s tax saving FDs are eligible for 80 C deduction on principal amount upto a certain limit. Likewise, principal amount invested in NCDs are not at all eligible for tax deduction.

Which is the good product out of – FDs, Tax saving FDs or NCDs?

Depending upon the volume of your investment, you should ideally proportionate your investment among these fixed income products (FDs, Tax saving FDs, NCDs) to reap the maximum earning with tax saving OR You may consult me to determine the same for you.

Note:
Above is written in context to Indian scenario and Indian Income Tax Law.