At current yields, PSU issues outshine private: Bajaj Cap

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Due to the excellent credit risk of government backed companies, joint managing director of Bajaj Capital, Sanjiv Bajaj, says that he prefers public sector bond issues over private, especially at the yields offered. Speaking about the government's 8.2% tax free bonds issued by PSUs, Bajaj said "it brings back the era of the RBI statutory bonds, so the response has been tremendous for these products."

He also adds that the response for Muthoot Finance's non-convertible debenture issue has been satisfactory.

Below is an edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: How do you rate the 8.2% tax free bonds in terms of return credit risk profiles etc?

A: Credit risk is excellent because these are brought in by government backed companies and the response has been tremendous. High networth individual (HNI) portions of these bonds were over subscribed twice in about 1 hour, so that shows that there is a tremendous confidence in these products.

Spreading awareness on the retail side takes some time, but retail responses are also very exciting. 8.2% is an excellent return, it brings back the era of the RBI statutory bonds, so the response has been tremendous for these products.

Q: We were speaking to a few mutual fund managers a few weeks back who pointed out that may be a slightly higher risk profile attached mutual funds. So is it much more lucrative to look at a pure debt fund from a mutual fund?

A: The concept is that in a debt fund, the maximum exposure to one bond or one unit is limited to 5-10% at maximum. So overall you are pooling risks and in that sense the risk profiling is less. But these are typically very good companies.

On one-two years, income funds are a very good option because interest rates should go down to support the economy and that would mean an exceptional gain for all the debt funds out there in the market. But when we look from a 5-10 year horizon, 8.2% tax free return is a very good investment because it is giving you a stable long term tax free growth, which is a very important part of your portfolio.

So both of them are catering to different segment - the debt funds are more for the people looking at 2-3 years horizon, whereas people looking to park their money for 5-10 years looking for regular income should look to tax free bonds.

Q: On Muthoot Finance's NCD issue, the rate seems extremely high at 13%.

A: Yes that's the situation in the market because interest rates have really gone up and that is affecting all the businesses. Muthoot, which is into gold loans and lending to a mass retail segment where they are able to charge a very decent interest rate from the consumer are willing to pay 13% plus. This is actually a very good option for those people who are in the lower tax slab or those who are looking for regular income because they are able to get an excellent absolute return and the response has been decent till now.

What has happened in past some NCD issues is that they were not marketed as a long term debt issues, but as an IPO. Like close ended mutual funds, you will get a return on listing because interest rates are likely to go down and these bonds will be quoting at a premium. So due to that, there is some confusion amongst some of the investors who thought these were short term products. But if you look at them as a long term product, these are secured and listed on the stock exchange.

When you compare them to a bank deposit, these are obviously much more riskier which is why you have to look at the credit worthiness of the company. At the end of the day, if you are ready to take the risk and if you are looking at a higher return, then these are good options for a person to invest in. They also offer liquidity since it is listed on the stock exchange, but you will have to keep in mind that the rate on the exchange is going to be effected on the interest rates in the market. If the interest rates continue to rise, these bonds will trade at a discount; if the interest rates start to fall they will trade at a premium. So those things have to be kept in mind but if you are looking to hold till maturity then they are a pretty decent option.

Q: For an HNI in the highest tax bracket, would you go for the safety of a government backed institution or would you go for that extra percentage point from a private company like Muthoot?

A: That's a call that an HNI will have to take because there is an absolute return. If you look at a person in a 30% bracket, he stands to make about a 1% extra and that's the rule of the game. The riskier return you go in for, you get slightly higher return, but you also get a substantially higher risk. So obviously you have to understand that Muthoot is a private NBFC and they are operating in a gold loan segment which is affected by the gold prices. It's also a very established brand which has been in existence for a long period of time.

On the other hand you have the power finance corporations and the other infrastructure issues which are coming which are backed by the government. I will say that if HNI puts a small portion of his investment into private NCDs, it's not a bad option. So both should form a part of the portfolio, with higher allocation towards government bonds and government papers. But 1% return difference is not a major difference, I would have typically preferred about 1.5 to 2% extra over the government paper. So I would say that probably today the government papers are very attractively priced.

So that's my personal call where I would have preferred a higher spread but both should form a part of the portfolio but private NCDs should be invested very selectively by looking at the company and the kind of security that has been provided, the kind of liquidity that is going to be available. So all those factors have to be kept in mind but if you like the interest rates you can have a small portion of your portfolio into these instruments.