Non-Convertible Debentures (NCDs) are emerging as a preferred choice for investors in India seeking stable and reliable returns in their investment portfolios. NCDs are fixed-income financial instruments issued by companies to raise long-term capital without offering any collateral. They carry a fixed interest rate and are distinct from convertible debentures as they do not provide an option to convert into equity or shares of the issuing company at maturity. Ideal for individual investors, banking institutions, and other corporate bodies, NCDs offer higher interest rates compared to their convertible counterparts and are an attractive option for those focusing on liquidity and risk management. Investing in NCDs involves understanding their structure, benefits, and the creditworthiness of the issuer to make informed decisions.
What is an NCD?
An NCD, or Non-Convertible Debenture, is a fixed-income instrument issued by companies to raise funds from the public. Unlike convertible debentures, NCDs cannot be converted into equity shares. Instead, they offer a fixed interest rate over a specific period, making them a popular choice for investors looking for stable returns.
Types of NCDs
NCDs are broadly classified into two types:
- Secured NCDs – These are backed by the issuer’s assets, making them a safer investment. If the company defaults, investors have a claim on the company’s assets.
- Unsecured NCDs – These are riskier as they are not backed by collateral. However, they usually offer higher interest rates to compensate for the increased risk.
Why Do You Need to Buy NCDs?
There are several compelling reasons why investing in NCDs could be a smart move:
1. Higher Interest Rates
Compared to fixed deposits (FDs) and savings accounts, NCDs offer significantly higher interest rates, often ranging between 7% to 12% per annum.
2. Fixed and Regular Income
NCDs provide a steady source of income with periodic interest payouts—monthly, quarterly, or annually—depending on the terms of the issue.
3. Diversification of Portfolio
For investors who rely heavily on stocks and mutual funds, NCDs can add stability to their portfolio by offering fixed returns, irrespective of market fluctuations.
4. Liquidity
Listed NCDs can be traded on stock exchanges, allowing investors to sell them before maturity if they need funds.
5. Tax Efficiency
Although interest from NCDs is taxable, certain tax-saving strategies can help investors minimize their liabilities, making them a viable investment option.
How to Start Investing in NCDs?
If you are considering investing in NCDs, follow these steps to make a well-informed decision:
1. Check Credit Ratings
Before investing, review the NCD’s credit rating. Higher-rated NCDs (AAA or AA) indicate lower risk, while lower-rated ones may offer higher returns but carry greater default risks.
2. Understand the Terms
Every NCD comes with a maturity period, interest rate, payout frequency, and security status. Read the offer document carefully before investing.
3. Choose Between Secured and Unsecured NCDs
If safety is a priority, opt for secured NCDs. If you’re willing to take risks for better returns, unsecured NCDs might be suitable.
4. Open a Demat Account
To invest in NCDs, you need a Demat account and a trading account, as most NCDs are available in dematerialized form.
5. Monitor Market Conditions
Interest rates fluctuate based on economic conditions. Investing when rates are high ensures better returns.
Risks of Investing in NCDs
While NCDs offer attractive benefits, they are not risk-free. Here are some risks to be aware of:
1. Credit Risk
If the issuing company defaults, investors may face losses, especially with unsecured NCDs.
2. Liquidity Risk
Although NCDs are listed on exchanges, they may not always have sufficient buyers, making it difficult to sell before maturity.
3. Interest Rate Risk
If interest rates rise after you invest in an NCD, your returns may seem less attractive compared to newer NCDs with higher rates.
4. Tax Implications
Interest income from NCDs is taxable as per your income slab, reducing overall returns.
Should You Invest in NCDs?
Investing in NCDs is a great way to earn fixed returns while diversifying your portfolio. However, it’s essential to evaluate factors like credit ratings, issuer credibility, and market conditions before making an investment decision. Whether you’re a beginner or an experienced investor, NCDs can be a valuable addition to your financial strategy if chosen wisely.
If you are looking for stable and higher returns than traditional savings instruments, investing in NCDs is a good choice. However, always assess your risk appetite and diversify your investments to avoid overexposure.
Who Should Invest in NCDs?
- Retirees and conservative investors looking for a fixed income.
- Investors seeking diversification beyond stocks and mutual funds.
- Individuals willing to take calculated risks for better returns.
FAQs on Non-convertible debentures in india
1. Are NCDs better than fixed deposits?
Yes, NCDs typically offer higher interest rates than fixed deposits, but they come with risks like credit defaults.
2. Can I sell NCDs before maturity?
Yes, listed NCDs can be traded on stock exchanges, but their liquidity depends on demand.
3. How is the interest on NCDs taxed?
Interest income from NCDs is taxed as per the investor’s income tax slab.
4. What happens if the company defaults?
For secured NCDs, investors have a claim on the company’s assets. For unsecured NCDs, there is no guarantee of recovery.
5. How can I buy NCDs?
You can buy NCDs through your Demat account during an issuance or from the stock market if they are listed.
