All About Non Convertible Debentures

Discussion on Types of NCDs and Their Benefits

For Investing there are many options for investors . Some investors prefer to invest in company equity stocks while conservative investors opt for debentures.

Debentures can be described as simple debt instruments that a company issues when it needs to borrow money from the market. Some debentures may be converted into equity at the owner's discretion. These are convertible debentures . The non-convertible bonds (NCDs) are on the opposite side. Non-convertible debentures work like company fixed deposits but investors often get confused about how to invest in NCDs.

NCDs can be considered investment instruments that provide a fixed return but are not guaranteed. This is an alternative to bank fixed deposits, which are also fixed tenure investments that offer a return at a fixed interest rate. However, NCDs offer a 10-12 percent return on your investment as opposed to bank FDs. Attractive right? Let's talk about how to buy NCDs to diversify your portfolio.

Types

Non-convertible debentures are debt instruments. They share many features with bonds which is also a debt instrument that generates fixed income. There is one primary difference between them. While bonds are secured loans, NCDs can be both secured or unsecured. These are unsecured and offer a higher rate than bonds.

You can have both secured and unsecure NCDs. There are also call and put NCDs. An 'appellable' NCD is one that allows the issuer to redeem the debenture at any time before maturity. NCDs are on the opposite side of the spectrum. They allow investors to redeem the debenture prior to maturity if the interest rates rise or the investor finds a better-yielding option.

Benefits

There are many benefits to investing in NCDs, such as

Higher interest rate: In the past, NCDs offered better income than bank fixed deposits and bonds. The average return on NCDs ranges between 10-12 percent which is significantly more than other investment options.

Liquidity Investors can purchase or sell NCDs on the secondary market just like they can with equities. Investors find NCDs attractive because of their higher liquidity. NCDs are halfway between equities and bonds in terms of liquidity.

You receive principal amount and accrued interest when you redeem NCDs at maturity.

Where to purchase NCDs

NCDs are issued initially by the company on the exchange, and then traded in the secondary markets. You can choose to either subscribe immediately after a company issues NCDs or to buy them later in secondary market trading. These NCDs are issued by listed companies in BSE and NSE . These instruments can also be publicly traded. The credibility of a company is a key factor in determining the value of an NCD. When choosing the best NCD deals, consider the credit rating of the company as well as the coupon rate and credibility of the issuers. NCDs are given a rating by credit rating agencies. Higher ratings, such as AAA+ or AA+, are better. The offer will be more attractive if it has a higher rating. Check the financial statements of the company. You can have peace of mind by investing in trustworthy companies that are profitable and have a track record of loan repayment.

The tax consequences of investing in NCDs include the taxation of interest income. This is different from income tax slabs. Short term capital gain tax is also levied if the NCD is traded in the secondary market within one year. After taxation, long term capital gain tax will be imposed at 20%.

Conclusion

If you are looking for a fixed income, NCDs can be a great investment option. These are unsecured debt instruments, so there is a higher risk when the company is in financial trouble. But default is not likely.

NCDs offer higher returns than other fixed-rate investments options. NCDs can be a great choice if you want to diversify your portfolio and reduce risk exposure while still getting a fixed return. You can now buy NCDs online.