In today’s financial landscape, Non-Convertible Debentures (NCDs) have emerged as an attractive investment option for those seeking fixed-income instruments that offer higher returns than traditional bank deposits. These financial instruments are issued by companies to raise capital, bearing a fixed tenure and interest rate. This blog delves into the world of NCDs, exploring their features, benefits, and risks to help you make informed investment decisions.
Understanding Non-Convertible Debentures (NCDs)
Non-Convertible Debentures, commonly known as NCDs, are debt instruments issued by companies to secure long-term funds from the public. The term ‘non-convertible’ is key, signifying that these instruments cannot be converted into equity shares of the issuing company. NCDs are characterized by a fixed tenure, typically spanning 1 to 10 years, and offer investors a regular fixed interest payment throughout this period.
Key Features of NCDs
Here are some critical features of NCDs:
Tenure: NCDs come with a predefined tenure, meaning investors must hold onto the instrument until maturity to receive the principal amount.
Interest Rate: NCDs offer a fixed interest rate, which typically outperforms the interest rates provided by bank fixed deposits. The precise interest rate is often determined by the credit rating of the issuer – higher-rated issuers tend to offer slightly lower interest rates, while lower-rated companies offer higher rates.
Credit Rating: NCDs are subject to credit ratings provided by agencies like CRISIL, ICRA, and CARE. These ratings reflect the issuer’s capacity to meet principal and interest obligations. To reduce the risk of default, it’s wise to invest in NCDs from companies with high credit ratings.
Liquidity: It’s essential to note that NCDs are not highly liquid investments, as they are not actively traded on stock exchanges. While you can sell them in the secondary market, this may sometimes involve a discount on the face value.
Advantages of Investing in NCDs
Investing in NCDs presents several advantages:
Enhanced Returns: NCDs provide higher returns compared to traditional fixed deposits, making them an appealing option for investors seeking fixed-income instruments with a better yield.
Diversification: NCDs allow investors to diversify their portfolios by investing in debt instruments from different companies with varying credit ratings.
Tax Benefits: Certain NCDs offer tax benefits under Section 80C of the Income Tax Act, 1961, making them an attractive choice for tax-savvy investors.
Risks Associated with NCDs
While NCDs offer numerous benefits, they also carry some risks, including:
Credit Risk: NCDs are susceptible to credit risk, denoting the possibility of default by the issuing company. Minimize this risk by investing in NCDs from companies with high credit ratings.
Interest Rate Risk: NCDs are influenced by interest rate fluctuations, which can affect the investment’s value. Rising interest rates can lead to a decrease in NCD value and vice versa.
Liquidity Risk: As mentioned, NCDs are relatively illiquid, making them less straightforward to sell on the secondary market.
In Conclusion
Non-Convertible Debentures (NCDs) have evolved as an appealing investment option, offering higher returns than traditional bank deposits. Their benefits, such as enhanced returns, portfolio diversification, and tax advantages, make them stand out. However, they are not without risk. Like any investment, it’s vital to conduct thorough research and choose NCDs from reputable companies with high credit ratings and a history of servicing their debts reliably.