- Date : 13/02/2020
- Read: 4 mins
- Read in English: A beginner’s guide to investing in non-convertible debentures
Non-convertible debentures (NCDs) are fixed-income products that offer a fixed interest rate on investments. If you are looking for a high-return, high-liquidity, low-risk investment that also offers tax benefits, NCDs can be your one-stop shop.
While investing in any security, you might want to look at risk and liquidity, along with the returns. Every investor has a different appetite for risk. Since equity markets are full of short-term volatility, they may not suit everyone’s risk appetite.
For such investors, debentures can be an attractive investment option. These are a type of debt instrument, like bonds. Based on convertibility, debentures can be classified as convertible debentures and non-convertible debentures.
What are NCDs?
Non-convertible debentures (NCDs) are fixed-income products that offer a fixed interest rate on investments. Unlike convertible debentures, you cannot convert an NCD into equity on maturity.
If you’re looking for a high-return, high-liquidity, low-risk investment that also offers tax benefits, NCDs can be an ideal choice.
How do NCDs work?
If a company wishes to raise money from the public, it issues a debenture for a specified period. This debenture is like a loan where the company offers a pre-determined interest rate to the investors. Only companies with good credit ratings are authorised to issue NCDs.
Interest rates and credit ratings are diametrically opposed to each other. The higher the credit rating the lower the interest rate will be, and vice versa.
What are the types of NCDs?
Non-convertible debentures are of two types: secured debentures and unsecured debentures
Secured NCDs – With secured NCDs, even if the issuing company defaults, the assets of the company secure the debentures. Therefore, investors holding such debentures can claim their investment through liquidation of the company’s assets.
Unsecured NCDs – In this case, liquidation of company assets is not possible. However, any company that issues an NCD has to get it rated by an agency such as Crisil, ICRA, CARE, or Fitch. This rating is an indication of the company’s ability to repay debt.
The risk profile of these debentures can be judged through these ratings. The lower the rating, the higher the credit risk, and vice versa.
How to invest in NCDs?
Primary market – Companies provide NCDs through an open issue. Anyone can buy these debentures within a specified period. During the public issue, you can invest in them by submitting a form.
Secondary market – You can also buy NCDs from the stock market. After the public issue, these bonds are listed on the NSE or BSE or sometimes on both. You can invest in these bonds just as you invest in shares.
What are the benefits of investing in NCDs?
- Most NCDs offers dual earning potential – both growth-based and interest-based.
- There is no tax deduction at source (TDS) for listed NCDs.
- NCDs are listed on BSE and NSE and can be traded; this provides greater liquidity.
- The lock-in period is just two years; this again offers greater liquidity.
- The investment tenure can range from 2 to 20 years. So you can do goal-based planning with the help of NCDs.
- You can judge the risk associated with the debenture via its ratings. Agencies like CARE, Fitch, Crisil, and ICRA provide ratings that help you assess this before you invest.
- NCDs offer returns of around 10-12%, which is higher than other fixed-income instruments such as fixed deposits (7-8%) or government bonds (8% max). Thus, they offer returns that are over and above inflation.
- You can also hold the debenture in Demat form and easily track your investments.
To sum up: if you are looking for convenient, low-risk, high-return and high-liquidity fixed-income investments, NCDs can be an ideal choice.