How to Buy NCDs: Discussion on Types and Benefits
When it comes to investment, there are multiple options available to suit your investor profile. While some investors prefer to invest directly in company equity shares, conservative investors pick up debentures.
Debentures are simple debt tools, issued by a company when it wants to raise loans from the market. Some debentures can be changed into equities after some time at the discretion of the owner. These are convertible debentures. On the other side opposite side lie the non-convertible debentures (NCDs). Non-convertible debentures function like company fixed deposits, but when it comes to investing, often investors get confused regarding how to buy NCDs.
NCDs are investment instruments that offer fixed return, although not secured in nature. It is an alternative to a bank fixed deposit, which is also a fixed tenure investment that generates a return on a fixed rate of interest. But contrary to bank FDs, NCDs generate 10-12 percent return on investment. Attractive right? So, let’s discuss how to buy NCDs to diversify your portfolio.
Types
Non-convertible debentures are debt instruments and share several features with bonds, which is also a debt instrument generating fixed income. However, there is a primary difference between the two. Bonds are secured forms of loan, whereas NCDs are both secured and unsecured. Since these are unsecured, they offer a higher rate of return compared to bonds.
NCDs can be both secured and unsecured. Further, there are call and put NCDs. A ‘callable’ NCD means the issuer reserve the rights to redeem the debenture at any date before maturity. Put NCDs lie on the other side of the spectrum, allowing investors the right to redeem the debenture before maturity if the interest rate goes up and the investor finds a higher-yielding option.
Benefits
The benefits of investing in NCDs are quite a few, like
Higher interest rate:
Historically, NCDs have offered better income than bonds, and bank fixed deposits. The average return on NCDs is between 10-12 percent, which is significantly higher than other similar investment tools.
Liquidity:
Unlike bonds, investors can buy or sell NCDs in the secondary market, just like equities. The higher liquidity factor makes NCDs an attractive investment option for investors. In terms of liquidity, NCDs lie halfway between bonds and equities.
When you redeem NCDs on maturity, you receive the principal amount along with accumulated interest.
How to buy NCDs
NCDs are initially issued by the company in the exchange and later traded in the secondary market. So, you can either choose to subscribe when a company announces NCD or buy later in the secondary market when it is trading. Listed companies issue NCDs in BSE and NSE, where these instruments are also publicly traded. When we are at the topic of how to buy NCD, we must mention that the value of an NCD offer depends on the credibility of the company. Hence, while choosing the best NCD offers, check the credit rating of the company, along with coupon rate, and credibility of the issuers. Credit rating companies give a rating to NCDs. It is advisable to buy NCDs that are given higher ratings like AAA+, AA+, and the like. Higher the rating, better is the offer. Also, check the financial statement of the company. Investing in credible companies – profitable, with a good record of loan repayment, all ensure both good return and peace of mind.
Investing in NCDs also has tax implications, like the interest income is taxed as per income tax slabs. Also, if you trade the NCD in the secondary market before one-year, a short-term capital gain tax gets levied. After the first year, long-term capital gain tax is imposed at the rate of 20 percent after taxation.
Conclusion
NCDs are a good investment choice when you prefer fixed income on your investment. But since these are unsecured debt tools, risk increases when the company is struggling to perform. However, the chances of default are rare.
When compared to other fixed-rate investment options, NCDs offer a higher return. Overall, if you are considering to diversify your portfolio, reduce risk exposure, and want assured fixed return, NCDs are a great option. Nowadays, you can buy NCDs online.
