Non-Convertible Debentures – NCDs – An Overview

NCDs are issued by corporates to raise funds from the public and offer a fixed return. They come with a tenure of 90 days to 10 years which the investor can choose according to his cash flow requirement and goal period.

NCDs are listed in the market and it provides liquidity to investors.

There are two types of NCDs – Secured and Unsecured

Secured NCDs: These are backed by company assets which imply that in case of liquidation, the company has an obligation to pay the NCD holders. Secured NCD holders are paid by liquidating the company’s assets. Hence, the capital is relatively safe.

Unsecured NCDs: In case of default by the company, since it is not backed by assets of the company, the investor might lose the principal and interest. Hence, unsecured NCDs are riskier.

Advantages of investing in NCDs:
1. Interest rates are generally higher than bank fixed deposits and similar instruments.
2. As they are listed in exchanges, liquidity is available to investors in case of premature exit
3. NCDs are regulated by RBI, hence they follow the guidelines and processes as specified.
4. TDS is not deducted from the interest earned however interest income will be added as Income from other sources while filing income tax returns.

Factors to consider while investing in NCDs:

Credit rating: This is the most essential thing while investing in NCDs. Higher the credit rating, the better the company’s potential and credibility. Investors should invest up to a credit rating of A (which is of investment grade and has relative safety).

Corporate governance: Promoter’s longevity, the previous track record of NCDs, and their repayment track record without any default. The purpose of NCDs to raise funds should be clearly specified like the growth of the company etc… Offer document should carry the details of the objective of fundraising.

Some of the quantitative parameters like Debt-to-equity ratio, Capital adequacy ratio and Interest coverage ratio provide the financial strength of the company In case of adverse market situations.

To summarize, NCDs provide you portfolio diversification in the debt allocation and it should be done as per your risk profile, goal period and cash flow requirement.

To understand whether NCDs are required in your portfolio, Always consult a qualified financial consultant to plan your investment in NCDs and other market-linked offerings.

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