Jiraaf is a fintech platform and offers alternative investment products to retail investors. Better returns than fixed deposits. Higher risk. Are the higher returns worth the risk? If you must invest, how should you use such products from Jiraaf in the fixed income portfolio?
Disappointed with low returns from bank fixed deposits and debt mutual funds?
A few fintech firms such as Jiraaf have brought unique fixed income products (covered bonds, lease/inventory finance and invoice discounting) to Indian retail investors. These products offer a much higher interest rate compared to bank fixed deposits.
In this post, I will look at products offered by the fintech platform Jiraaf.
We will discuss the product structures, merits, and risks. And finally, should you invest? If yes, how much?
What kind of products does Jiraaf offer?
I checked the website.
Three products currently on offer (they can offer more).
- Invoice Discounting
- A has supplied products/services to B.
- B must pay Rs 10,000 to A after 30 days.
- A cannot wait for 30 days to get Rs 10,000.
- A approaches J.
- J pays Rs 9,800 to A.
- When B pays Rs 10,000, J gets the money.
- So, J makes an investment of Rs 9,800 and gets back Rs 10,000 after 30 days. Return of Rs 200 (~2%) in 30 days.
- Notes: Short Term product (Usually 1-3 months). Not common for retail investors.
- What are you betting on? You bet on B’s ability to make the payment. The contract will allow recourse to A if B fails to pay.
- Lease and Inventory Finance
- You give money to J and become a partner in JX LLP.
- JX (the lessor) buys cars and leases those cars to a TA (Taxi agency, the lessee)
- TA makes regular lease payments to JX.
- JX calculates net profit after adjusting for expenses, J’s cut, depreciation. Pays 30% tax on net profit.
- Distributes post-tax income to JX partners (you). Such distribution is tax-free in your hands.
- Notes: Tenure: 1-3 years. Not common for retail investors.
- What are you betting on? You bet on JX’s ability to rent out the assets. And TA’s ability to service then rentals.
- Non-convertible debentures (NCDs)
- Usually from lower rated corporates (the one mentioned above is BBB+ rated)
- Notes: Such NCDs are already available through regular channels. I see no merit. Higher interest rate clearly not worth the risk.
- Who are you betting on? The borrower (the corporate). Backed by security cover of 1X of loan receivables.
- Don’t invest here.
How much returns can you expect from Jiraaf products?
Will be different for various products categories.
If we check the image above, the lease finance product offers the best returns. This could be due to the nature of the product. The returns could also be higher due to depreciation expense and GST input credit bit. I have written about this in detail in post on Grip Invest. Post-tax returns in the range of 11-12% p.a.
In case of invoice discounting and NCD, the interest gets taxed in your hands at your slab rate. 11-12% pre-tax. Post-tax returns will depend on your tax slab.
Quite good for fixed income products.
What are the merits?
Always good to have a choice.
These products have always been around but were not easily available to retail investors (were primarily targeted at HNIs).
Credit to the fintech firms such as Grip, WintWealth and Jiraaf in bringing these options to retail investors.
What are risks of investing in Jiraaf Products?
Always remember, there is no free lunch in fixed income. Extra return comes at a higher risk, whether you appreciate the risk or not.
And it is not always easy to see risk. Mortgage bonds were considered super safe until the global financial crisis happened.
The unknown/unseen risks are the most damaging. For instance, there could be governance issues/frauds. OR if such products get popular, more platforms will offer these. They will structure more such deals. The quality of new offerings can gradually worsen. You may not realize that and may not adjust your portfolio approach.
I share a few easy-to-see risks in these products from Jiraaf.
- Ability of lessee (say Taxi agency) to service the lease payments.
- Low Asset utilization due to market/economic conditions. For any reason, the lessor (car owner, the LLP) is unable to lease out the assets.
- Lower than expected residual value of the asset. You will notice a big lumpsum payout towards the end of the tenure. This money comes from the sale of asset (cars).
NCDs: The borrower can default on payments.
Invoice discounting: Short-term (But you will have to invest your money multiple times). Hence, relatively less risky compared to the above two. Defaults could still happen.
Should you invest in Jiraaf products?
I am never keen on taking too much risk with fixed income portfolios. Do not chase returns with the fixed income investments. Fixed income portfolios provide stability to the portfolio and a peaceful night’s sleep to the investor. For taking risk and earning higher returns, I invest in stocks/equity funds.
However, it is easy for me to say this since I am relatively young. Low interest rates bother me but not too much. Plus, returns in the stock markets over the past 2 years have made up for the low returns in the fixed income portfolio. So, I am ok.
Low interest rates are particularly harsh on savers and retirees. Low risk-taking ability and low risk appetite. May not be investing in stocks/equity funds. Now, such investors will find Jiraaf or Grip products the most appealing. Return prospects are high and the risk SEEMS low. And that’s my worry.
When you invest in a RISKY product thinking it is a RISKY product, it is fine. You know what you are getting into. With proper appreciation of risk, you size your bet properly. You know stocks are risky. That’s why you don’t put 100% of your money in stocks.
When you invest in a RISKY product thinking it is a SAFE product, we have a problem. This is because unless you appreciate the risk properly, you can’t size your bet properly. You might end up putting too much.
Jiraaf products offer better return prospects but cannot be replacements for bank fixed deposits. Appreciate the risk involved before investing.
- Does Jiraaf offer the prospect of higher returns than bank FDs? Yes
- Is Jiraaf risky compared to bank fixed deposits? Yes
- Does Jiraaf offer guaranteed returns? No
- Is there a risk that you may not get (all/any) of your money back? Yes
By the way, if you are looking for high returns but with low risk, an annuity product could be the answer. You just need to purchase the right annuity variant at the right age.
How to use such products in your portfolio?
Despite all my apprehensions, Jiraaf offers super returns for a fixed income product. 11-12% post-tax is almost equity like return.
Do you plan to invest in Jiraaf products?
It is not as if you will not invest after reading this blog.
Therefore, a more important question is “If you must invest, how much should you invest in such products?”
If you must invest, consider such investments part of satellite fixed income portfolio. Consider the possibility of things going wrong. Size your bet properly. Limit exposure to 5-10% of the fixed income portfolio into such products.
Note: Each deal is different. No two invoice discounting deals are the same. No two lease finance deals are the same. Read and understand the deal structure and other details before investing. Appreciate risk and limit exposure.