Corporations can raise investors' money by issuing Non-Convertible Debentures (NCDs) debt instruments. NCDs cannot be converted into equity shares, in contrast to convertible debentures. They have predetermined maturity dates and fixed interest rates, making them a generally stable investment choice. Your risk tolerance, investment objectives, and the creditworthiness of the issuing company will all influence whether you should invest in NCDs. Be sure to fully investigate and assess the financial standing of the NCD issuer before making any investing decisions.
In today's world of money and shares, several tempting options are available for investors. But each has its pros and cons with different levels of potential returns. Non-convertible debentures (NCDs) are investors' most popular options. Before investing in NCDs, one must know what Non-convertible debentures are, how they work, and their advantages and disadvantages.
Non-convertible debentures (NCDs) are considered the best choice in the market regarding long-term financing solutions. These individual fixed-income securities offer investors attractive interest rates alongside predictability, making them intriguing as an investment option.
Did you know?
Non-Convertible Debentures (NCDs) have gained popularity among retail investors due to their higher interest rates than traditional fixed deposit schemes banks offer.
What Are Non-Convertible Debentures?
For better understanding, non-convertible debentures can be comprehended as financial instruments to raise funds from the public, which a company issues. They are called non-convertible because they cannot be converted into equity shares of the issuing company.
Moreover, NCDs pay a fixed interest rate to the investor for a specified period.
Primarily NCDs can be defined as long-term bonds offering fixed interest rates to investors. Companies issue NCDs to cover their financial needs, such as funding plans or repaying debts.
Features of Non-Convertible Debentures
Non-convertible debentures have the following features:
1. Fixed Interest Rates: NCDs' interest rate is determined and fixed at issuance time. This makes it a reliable choice regarding regular income and stability for investors.
2. Tenure: Investors can plan and schedule their financial goals and risk according to the maturity period of NCDs. Usually, NCDs have a rigid maturity period ranging from months to years.
3. Credit Rating: NCDs are rated by credit rating agencies, such as CRISIL, ICRA, and CARE. Whenever there is a high credit rating, it means there is lower credit risk and higher chances of on-time payments and repayments.
4. Listing and Trading: Listing NCDs on stock exchanges such as National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) makes it much easier to trade.
5. Taxation: Interest earned on NCDs is taxable as per the investor's income tax slab. However, no tax is deducted at source (TDS) for NCDs listed on stock exchanges.
Why Do Investors Choose Non-Convertible Debentures?
There are several reasons for investors to choose NCDs. Some of these are mentioned below.
- Fixed Income: Investors get a fixed interest rate in a scheduled manner; it could be monthly, quarterly, semi-annually, or annually.
- Diversification: Investing in NCDs can help diversify an investment portfolio, as they correlate poorly with equity investments. This helps to minimise the overall risk of the portfolio.
- Capital Preservation: Since NCDs are debt instruments, they are considered less risky than equity investments. This makes them suitable for investors who prioritise capital preservation.
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Factors to Consider Before Investing in Non-Convertible Debentures (NCDs)
There are several factors to consider when investing in Non-Convertible Debentures. Some of these are listed below.
- Credit Rating: If there is a higher credit rating, it means that there is lower credit risk. Before investing, Investors should consider the NCD's credit rating because it shows if the issuing entity can pay the interest and other repayments.
- Interest Rate Environment: NCDs usually offer higher returns than other investment structures in the case of falling interest rates.
- Company Fundamentals: The performance of the company issuing the NCDs should be analysed along with its financial health before investing. A company with a fit balance sheet and consistent cash flow is considered reliable and can meet its debt obligations.
- Tenure and Liquidity: Investors should consider the term of the NCD and their investment horizon before investing. While NCDs are listed on stock exchanges, liquidity may be limited in the secondary market, making it easier to sell them before maturity.
Non-Convertible Debentures (NCDs) in India
The Securities and Exchange Board of India (SEBI) modulates and supervises non-convertible debentures in India. There are specific guidelines issued by the for issuing and listing NCDs. Also, government bodies and public and private companies can give NCDs.
Some Benefits of NCDs in India
Some benefits of NCDs in India are as follows:
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Tax Benefits: Many tax benefits come with the non-convertible debentures issued by Indian companies, as they are eligible for tax benefits under Section 80CCF of the Income Tax Act.
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High Returns: NCDs issued by Indian companies can offer higher returns than other fixed-income securities such as bank fixed deposits.
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Diversification: Investment in different sectors, such as infrastructure, real estate, and finance issue NCDs, provides a much more diversified portfolio.
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Non-Convertible Debentures (NCD) Listing and Finance
Non-convertible debentures can be listed on stock exchanges, which makes them more accessible to investors. Listing NCDs on stock exchanges can also give companies access to a broader pool of investors.
Some Benefits of NCD Listing
Some benefits of NCD listing are as follows:
- Access to Capital: Listing non-convertible debentures on stock exchanges can give companies access to a broader pool of investors, which can help them raise capital more easily.
- Increased Visibility: Listing non-convertible debentures on stock exchanges can increase the visibility of the issuing company, which can help attract more investors.
- Liquidity: Listing non-convertible debentures on stock exchanges can make them more liquid, which can be an advantage for investors who must sell their investments before their maturity date.
NCDs vs Other Investment Options
To better understand the suitability of NCDs as an investment option, let's compare them with other popular investment choices:
- Fixed Deposits (FDs): Fixed deposits are popular for conservative investors seeking safety and guaranteed returns. While FDs offer a fixed interest rate and capital protection, the interest rates are generally lower than those NCDs provide. In addition, the premature withdrawal of FDs includes penalties and does not provide similar liquidity to NCDs.
- Government Bonds: These bonds are considered one of the safest as the government regulates them. But, the interest rate offered on these bonds is reasonable and typically lower than NCDs. In addition, the time period for these bonds is extended, making it an unpreferable choice for investors.
- Corporate Bonds: Corporate bonds are debt instruments issued by companies, similar to NCDs. However, corporate bonds may be convertible into equity shares, unlike NCDs. Corporate bonds usually have higher interest rates.
- Mutual Funds: Mutual funds collect funds from investors and use them to create a well-diversified investment portfolio.
NCDs can be suitable for investors looking for a more stable and predictable income stream because mutual funds have a higher financial risk.
Convertible vs. Non-Convertible Debentures
The debt instruments that can be converted into equity shares of the company that issues it, later on are known as convertible debentures. On the contrary, non-convertible debentures do not provide this feasibility of getting converted into equity shares of the issuing company.
- If the value of the issuing company's share increases, convertible debentures provide the potential for capital appreciation.
- For companies who want to raise funds at a lower cost, convertible debentures are quite advantageous as they usually offer lower interest rates than non-convertible debentures.
- There is more flexibility in the case of convertible debentures than non-convertible debentures in terms of equity conversion.
Building a Balanced Portfolio with NCDs
To optimise your investment portfolio, it is essential to strike a balance between risk and return. Including NCDs in your portfolio can help you achieve this balance by providing stability and regular income.
Here are some tips for incorporating NCDs into your investment strategy:
- Diversify across sectors: Invest in NCDs issued by companies from different sectors to reduce sector-specific risks. This can help protect your portfolio from downturns in any particular industry.
- Diversify across credit ratings: While investing in higher credit ratings is generally safer, you can consider allocating a small portion of your portfolio to lower credit ratings for potentially higher returns. However, be prepared to take on the additional risk associated with lower-rated NCDs.
- Match investment horizon with NCD tenure: Choose NCDs with terms that align with your investment horizon. Opt for NCDs with shorter tenures if you have a short-term investment horizon. Conversely, if you have a long-term investment horizon, you can consider NCDs with longer terms.
- Monitor interest rate trends: Keep an eye on interest rate trends and adjust your NCD investments accordingly. Locking in higher fixed interest rates with NCDs can be beneficial in a falling interest rate environment. However, in a rising interest rate scenario, you should reconsider your NCD investments or opt for shorter tenures.
- Regulated balance among different asset classes: It is essential to look after other asset classes, such as equities, mutual funds, and fixed deposits. There should be a mixture of assets to fulfil one's financial goals and investment horizon and get a well-diversified portfolio.
- Periodic revision of your portfolio: One should always go for a systematic revision of their investment portfolio. This will ensure it is in check with one's financial aims and risk tolerance. Rebalance your portfolio as needed by adjusting your NCD investments and other asset allocations.
Conclusion
Non-convertible debentures are highly regarded as a dependable and popular choice for investors seeking stable returns through income securities. These investment instruments offer investors a predetermined interest rate for a specific duration, making them particularly advantageous for risk-averse individuals.
SEBI controls and manages NCDs in India. There are many tax benefits and higher returns offered than other fixed-income securities.
You can also list non-convertible debentures on stock exchanges as they give companies access to a broader range of investors and make them more liquid. However, companies must comply with different guidelines and regulations.
Non-convertible debentures are considered profitable and advisable for all kinds of investors in the market who want fixed-income securities. However, investors should consider and compare the pros and cons before investing in NCDs.
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