Non Convertible Debentures
Updated on July 18, 2023
NCDs, which stands for Non-Convertible Debentures, are investment instruments issued by companies, financial institutions, or government bodies to raise capital from investors. They offer fixed returns over a specific period and are a popular choice for investors seeking stable income. Unlike convertible debentures, NCDs cannot be converted into company shares. They are often listed on stock exchanges, allowing investors to buy or sell them before their maturity date, providing liquidity in the market.
What are the benefits of investing in NCDs?
Fixed Income – Investing in NCDs provides a steady and predictable stream of fixed income through regular interest payments.
Diversification – NCDs offer an opportunity to diversify investment portfolios by including fixed-income securities alongside other asset classes like stocks and mutual funds.
Capital Preservation – NCDs generally have a lower risk profile, making them suitable for conservative investors who prioritize capital preservation.
Higher Returns – NCDs often provide higher interest rates compared to traditional fixed deposits, potentially offering better returns on investment.
Liquidity – Listed NCDs can be traded on stock exchanges, allowing investors to sell them before maturity and access liquidity if needed.
Tax Efficiency – NCDs may offer tax advantages, such as lower tax rates on long-term capital gains if held for more than 12 months, enhancing post-tax returns for investors.
Factors to consider while investing in NCDs
Credit Rating – Evaluate the credit rating of the NCD issuer to assess the issuer’s ability to meet interest and principal payments.
Interest Rate – Consider the offered interest rate and compare it with prevailing rates to determine if it provides an attractive return on investment.
Issuer Reputation – Research the reputation and financial stability of the issuing entity to gauge its credibility and track record.
Investment Horizon – Determine the desired investment duration as NCDs have fixed tenures, ensuring alignment with your investment goals and liquidity needs.
Liquidity – Assess the liquidity of the NCDs by considering whether they are listed on exchanges and the ease of selling them before maturity.
Redemption Terms – Understand the redemption terms, including the repayment schedule and potential call or put options, to evaluate the flexibility of the investment.
Market Conditions – Monitor the overall market conditions and interest rate movements as they can impact the performance and pricing of NCDs.
