Covered bonds are relied on by many institutional investors like Private Family offices, Mutual funds, who want good returns and better credit quality. Risk in covered bonds is high but it’s lesser than that in equity.
Anshul Gupta, Co-Founder, WintWealth, told that when held for more than a year these debentures are tax-efficient as the investor is only charged 10 percent LTCG (Long Term Capital Gain) on the interest without taking into consideration the investor’s tax slab.
Industry experts say that debt instruments are less risky than equity instruments if the benchmark chosen is low. Gupta further adds that they are not subject to much uncertainty because markets are mostly above this benchmark and investors can still get to enjoy high returns.
Why are Covered Bonds and MLDs still not popular despite being less volatile?
Covered Bonds and Market linked debentures are not easily available in the market for everyone as they require large ticket sizes of one crore or more. Experts say that is why they are rare and have low participation. However, nowadays these are available in smaller ticket sizes as well.
Gupta also informed that “Covered Bonds, a commonly used product in European markets for more than a century, is an effective solution here. He explained the working of covered bonds: the NBFCs are asked to hold a minimum of 5–10 percent of the loans by the regulator. Then company Z will ask NBFCs to provide 100 percent of the way out, over the investment in the products, thus offering a secure structure to their investors. This means So that even if all the loans in the pool default, NBFC would still have to pay back the money.
He further adds, If a loan has become NPA, it must be replaced with a new performing loan by the NBFC.
Who should invest in Covered Bonds and MLDs?
Investors in the 30 percent bracket should primarily look at investing in these because they gain the most, industry experts say. They pay LTCG at 10 percent, instead of being charged their slab rate and this puts less dent in their income. Furthermore, People interested in better debt investments should look at these based on their risk appetite.