Aside from investing in a fixed deposit or mutual fund, some retail investors tend to invest a part of their money in the issue of debentures as well.
Muthoot Finance recently announced the public issue of secured redeemable non-convertible debentures which will soon close on Friday. It is a small issue with a base size of ₹75 crore with an option to retail oversubscription up to ₹225-crore. The issue, states the NBFC, has a high degree of safety of AA+.
The non-banking financial company (NBFC) is offering an interest rate of up to 8 percent.
What is a debenture?
A debenture is a type of bond or other debt instrument that is usually unsecured by collateral. Since they have no collateral backing, they rely on the creditworthiness and reputation of the issuer for support. Government as well as corporations frequently issue debentures to raise capital or funds.
As far as Muthoot’s public issue is concerned, the prospective investors can invest application amount only via ASBA (Applications Supported by Blocked Amount) mode. The NBFC gives three interest payment options: 24-months, 36-months and 60-months.
The 24-month coupon gives an income of 7.5 percent, 36-month coupon will give an income of 7.75 percent and 60-month coupon gives 8 percent return, says Muthoot Finance in a statement.
In other words, when someone invests ₹1,00,000, it becomes ₹1,25,098 in 36 months and ₹1,46,933 in 60 months.
Small investors tend to rely on non-banking financial companies for earning a higher interest via fixed deposits or debentures.
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Wealth advisors, however, urge them to check the credit rating of an issue by NBFC before locking their money merely to earn a higher rate of interest.
“Return of capital should always be more important than the return on capital,” says Deepesh Raghaw, Founder of Personal Finance Plan.