How safe are secured debentures for a senior citizen? What kind of credit rating would be safe for assured returns? How do they compare with the debt mutual funds?
- Parameshwaran MA
Secured debentures have a tangible asset backing them, but many debentures are unsecured with no asset to back those instruments. I would suggest you err on the side of caution. All retirees should look at debt products that are no lower than AAA or at most AA rated. It is easy to invest in debentures, and if all goes well, you get your interest and your capital back on time. But the problem is, if something goes wrong, you don't get anything. So there is a concentration risk here.
When you invest in a mutual fund, 2-5 per cent of your money could be in a bond like that. Even they can inflict losses, but it is only a small part of your money if that happens. Thus, diversification is beneficial, and you get it with mutual funds. Another thing is when you invest in a debenture, you are tied for the entire tenure, and you don't have the interim liquidity of the kind you get in mutual funds. Further, mutual funds have tax efficiency. If you hold a fixed-income fund that invests in such debentures for three years, it is taxable as capital gains after indexation when you sell it. However, in a debenture, all the interest income that accrues during the financial year becomes taxable income for that particular year.
These are the broad differences. If you choose to go for debentures, the ones with high credit rating will not yield high returns and the ones with lower credit rating will be risky. So if at all you would like to go for a debenture, make sure that its credit rating is the highest, though it will not yield very high return.