NCD -The best way to invest in debt
Investment has to become a regular activity in our lives. During uncertain financial times, only our investment and savings would save us. Though there are several investment avenues, stock market is a one stop destination to achieve varied investment goals. Investors are of various kinds as some are daring when it comes to risk taking whereas some are risk averse and extremely conservative when it comes to investing.
Some expect higher returns and capital appreciation, but few are happy with capital preservation and regular income. NCD (non convertible debentures) is one such financial asset that provides you regular interest. Most of us are aware of equity, mutual funds and other kinds of investment assets. But not many of us are familiar with debentures. Let us read in detail about debentures and non convertible debentures here. People who are not willing to park their funds in equity but aspire for higher interest rates, can choose NCDs.
What is non convertible debentures (NCD):
As NCDs are also a kind of investment, one has to know NCD meaning before investing. Debentures are those issued by companies as a means of long term financing. It’s a kind of debt obligation and is similar to bonds but the major factor to be kept in mind is that some debentures are unsecured and if the company defaults, investor cannot have any claims to the assets. It is important to know what is NCD and how an investor can benefit from it.
You might be aware of IPOs that are issued by companies so as to raise capital. That is a way of getting money from investors through equity mode. NCDs are usually issued by corporate for want of capital. It is purely a debt instrument wherein companies rated by rating agencies take loan from investors and on the other hand offer regular interest as per your desired time interval. While some debentures can be converted to shares, some cannot be and those are called as non convertible debentures India. As these are non-convertible, the rate of returns is usually higher in comparison to that of convertible debentures. Since you have got a clear understanding about non convertible debentures meaning, now let’s know the types and features.
Types of NCDs:
The two types of NCDs are secured and unsecured; Secured NCDs are backed by certain assets and so even if the company defaults, the assets of the company can be liquidated to give back the investor’s investment. When the company gets into a financial crunch, there will be problems in getting interest payments in case of unsecured NCDs.
Features of non convertible debentures:
This is the important feature as highly liquid assets are the need of the hour. In case of emergency, one should be able to readily encash the asset. On that point, NCD scores high as NCDs are listed on the exchanges, liquidity is high. One can easily buy or sell NCDs in the secondary market anytime.
2. Interest rates:
The returns are higher compared to FDs and NCDs offer high flexibility in terms of tenure as well. Since some of the debentures are unsecured, the rates of returns are quite high. Usually NCD offers an interest rate ranging from anywhere between 8 to 12%. Monthly and annual interest payout option is available. One can even opt for a cumulative payout option.
Any company which wants to raise capital by means of NCD has to approach credit rating agencies such as CRISIL, CARE, ICRA, etc. for ratings. A company that has higher credit rating simply means that it would fulfill its obligations whereas a lower rating implies that the company has a higher credit risk. If the NCD issuing company defaults on payment, then the rating of the company is downgraded by the rating agencies.
NCDs face default or credit risk. The company may fail to pay the creditors. In case of unsecured NCD, the investor has no option to get back his money. Before investing in an NCD, one has to check the repayment history of the company. Also credit ratings can help one understand about the level of risk involved in investing in a particular company.
If NCDs are sold within a year, short term capital gains will be applicable as per your tax slab. If sold after a year, long term capital gains would be applied at 20% with indexation.
NCD is highly flexible with a minimum tenure of 90 days to a maximum of 10 or more years. Based on their requirement, investors can opt for a short tenure NCD or a long tenure NCD.
How to buy NCD:
To buy a NCD, a demat account is necessary that will store all your shares in electronic format. Demat account can be opened with any of the stock brokers. You can buy NCD from a stockbroker (distributor) or directly from the issuing company. Before investing in NCD, one has to check the background of the company well and invest according to one’s goal and time horizon. Understand the company’s objectives behind the NCD issue. Hope you would have got a complete idea about what is NCD bond by reading this article.