Non-Convertible Debentures are popular investment options offering fixed income to investors with attractive returns. They provide great opportunities for investors seeking low-risk investment avenues with stable returns. Here is a comprehensive guide to demystifying NCDs. Learn what they are, how they work, their benefits, and other important considerations.
What is a Non-Convertible Debenture?
A non-convertible debenture is a fixed-income instrument that corporations, government-backed entities, and financial institutions issue to raise capital from the public. As their name suggests, non-convertible debentures cannot convert into the issuing company’s shares. Instead, they offer a fixed interest rate over a period ranging from one to ten years.
How Does a Non-Convertible Debenture Work?
When you purchase an NCD, you lend money to the issuing company and earn a regular interest and get the principal back at maturity. These debentures have a coupon rate that determines the investor’s interest income. According to the NCD agreement, you can earn a monthly, quarterly, or yearly interest payment.
Types of Non-Convertible Debentures
Different types of NCDs include the following:
- Secured NCDs: The issuing company backs these NCDs with certain assets, adding a layer of security. If a default happens, they can liquidate the assets to repay the investors.
- Unsecured NCDs: These subordinated debentures do not have the security of any assets. If a default happens, the investor’s repayment is not the top priority for the issuer.
- Callable NCDs: Companies that issue these NCDs can redeem them before maturity, giving them the flexibility to manage debt. On the other hand, they are not so favourable for investors if the issuer calls them when the interest rate is low.
Benefits of Non-Convertible Debentures
Non-convertible debentures are beneficial for investors in many ways, including the following:
- Regular Income: NCDs provide steady income through regular interest payments. Thus, they are attractive investment avenues with fixed-income returns.
- Diversification: These debentures diversify your investment portfolio, reducing the risk of fund allocation in different sectors and issuers.
- Higher Returns: Interest rates with NCDs are higher than traditional fixed-income instruments like fixed deposits.
- Flexible Tenure: NCDs have flexible tenures, allowing you to select a maturity period aligning with their liquidity needs and investment purpose.
- Regulated and Transparent: Regulatory authorities like the Securities and Exchange Board of India (SEBI) regulate NCDs in the country, ensuring investor protection and transparency.
Key Points to Consider When Investing in Non-Convertible Debentures
Have you made up your mind to invest in NCDs? Here are a few points to consider:
- Credit Rating: Check the issuing company’s credit rating to evaluate its default risk. Top-rated debentures offer smaller returns but also carry a lower credit risk.
- Interest Rate: Consider the current and predicted interest rates to measure their impact on debenture returns and costs.
- Investment Horizon: Evaluate your liquidity needs and investment horizon since these options have fixed tenures, and withdrawing them before maturity may incur penalties.
- Diversification Needs: While investing in NCDs or picking any other option like currency trading, try spreading your investments through multiple tenures, industries, and issuers. Doing that will mitigate the credit risk and help build a diversified portfolio.
- Read the Offer Document: Carefully read the prospectus, terms & conditions, and offer documents before investing to understand the NCD’s features and growth potential.
How to Invest in a Non-Convertible Debenture?
As an investor, you can invest in non-convertible debentures through multiple channels, including issuances directly from the issuing company or through transactions in the secondary market. A primary issuance occurs when a company launches a new NCD, while a secondary market transaction involves purchasing and selling an NCD on the stock exchange. While considering an NCD investment, you may approach a bank, brokerage firm, or financial institution.
Tips for NCD Investment
Here are a few tips for investing in NCDs:
- Read the terms and conditions carefully to get clarity about the investment.
- Diversify the portfolio across various periods and firms to reduce the risk.
- Do not invest in NCDs from a single sector, as it leads to high-risk exposure.
- NCDs in the secondary markets have higher chances of better returns.
- Never choose an NCD based on interest rate alone.
- Sell the NCD when the interest is due to make high profits.
With non-convertible debentures, you can have an opportunity to earn a fixed income with an attractive interest rate. Understanding its working, benefits, and key considerations helps you make informed investment decisions and diversify your investment portfolio effectively. Conduct thorough research, and evaluate credit ratings to invest in an NCD that best aligns with your risk appetite and financial goals.