Non-Convertible Debentures (NCDs) arguably remain the most sought out fixed income offering owing to the high returns and low risk they promise. They have become very popular with investors looking for fixed returns and preservation of capital. This guide aims at explaining what NCDs are, how they function, their benefits, and things to keep in mind before investing.
What are Non-Convertible Debentures?
NCDs are debt instruments issued by companies to raise funds from the public. As the name suggests, these debt instruments cannot be converted into shares of the issuing company. These bonds usually have a fixed term during which investors receive regular interest payments, also known as coupon payments. NCDs are listed on exchanges, providing liquidity to investors. At the end of the term, the principal amount will be returned to the investor. They are considered a safer investment option compared to stocks as they offer a fixed return.
Types of NCDs
NCDs can be broadly categorized into two types based on interest payment:
- Secured NCDs: Backed by the company’s assets, making them safer as investors can claim the assets in case of default.
- Unsecured NCDs: Not backed by any collateral, hence they carry a higher risk compared to secured NCDs but often offer higher interest rates.
Features of NCDs
- Fixed Returns: NCDs provide a predetermined interest rate, ensuring consistent income.
- Tenure: The tenure of NCDs usually ranges from 1 to 10 years, giving investors flexibility.
- Liquidity: Being listed on stock exchanges, NCDs can be bought or sold, providing liquidity.
- Credit Ratings: Credit rating agencies evaluate NCDs based on the issuer’s financial stability, helping investors assess risk.
- Taxation: Interest earned on NCDs is taxable under the investor’s income tax slab.
Benefits of Investing in NCDs
- Attractive Interest Rates: NCDs often offer higher interest rates compared to traditional savings options like fixed deposits.
- Diverse Options: Investors can choose from various tenures and interest payment frequencies (monthly, quarterly, or annually).
- Lower Risk: Secured NCDs provide a safety net for investors through asset backing.
- Portfolio Diversification: NCDs serve as an excellent addition to a diversified portfolio, balancing risk and returns.
Key Considerations Before Investing
- Issuer’s Creditworthiness: Always review the credit rating assigned by agencies like CRISIL, ICRA, or CARE to assess the issuer’s ability to meet financial obligations.
- Market Risks: The value of NCDs may fluctuate based on interest rate movements and market conditions.
- Lock-In Period: Ensure that the tenure aligns with your investment goals, as premature withdrawals may not be feasible or could incur penalties.
- Tax Implications: Factor in the tax liability on the interest income to evaluate net returns.
How to Invest in NCDs?
Investing in NCDs is a straightforward process. They can be purchased during the public issue or from the secondary market. Here’s how:
- During Public Issue: Apply for NCDs through brokers, banks, or online trading platforms during the subscription period.
- Secondary Market: NCDs can also be traded on stock exchanges, allowing you to buy or sell as per market rates.
Who Should Invest in NCDs?
NCDs are suitable for:
- Investors seeking steady income through fixed interest payments.
- Those with a low-risk appetite looking to preserve capital.
- Individuals aiming to diversify their investment portfolio.
Conclusion
Non-Convertible Debentures (NCDs) offer a compelling investment option for those seeking stability, regular income, and attractive returns. While they come with certain risks, conducting thorough research and understanding the issuer’s financial health can help mitigate these risks. As with any investment, it’s essential to align NCD investments with your financial goals and risk tolerance.
Start exploring NCDs today to unlock their potential for your financial growth!
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