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Debentures are long-term investment tools used by companies to raise funds from the public They are usually unsecured. This means they rely on the company’s reputation and financial strength rather than any physical asset. This is why well-known firms mostly issue them at a fixed interest rate. Debentures come in different forms, mainly convertible and non-convertible. While convertible ones can turn into shares later, NCDs do not offer this option. Before investing, it is important to understand how to buy NCD and choose wisely.
Key Takeaways
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Debentures help companies raise long-term funds at a fixed interest rate.
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They are usually unsecured and depend on the issuer’s reputation.
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Convertible debentures can turn into shares, but NCDs cannot.
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Knowing how they work helps investors choose safer, smarter options.
What are Non-Convertible Debentures?
Non-convertible debentures, commonly known as NCDs, are fixed-income investments that offer a set interest rate for a specific period. Companies issue them to raise money without giving investors the option to convert them into shares. Once you invest, you receive regular interest payments, and the full principal is returned at maturity. Since NCDs are not secured by physical assets, their safety depends largely on the financial strength of the issuing company. This is why credit ratings play a crucial role: they help investors assess an issuer’s reliability and repayment ability before investing.
Also Read: What is Value at Risk?
How to Buy NCDs?
When it comes to investing, people choose different options based on their goals and risk tolerance. Some prefer investing in equity shares, hoping for higher growth, while others lean towards safer choices like debentures. Debentures are simple debt instruments that companies use to borrow money from the public at a fixed rate of interest.
There are two main types, convertible and non-convertible. Convertible debentures can be turned into company shares after a certain period, if the investor chooses. Non-convertible debentures, or NCDs, do not offer this option. They work more like company fixed deposits, providing regular income over a fixed term.
NCDs are not backed by assets, but they usually offer returns of 10%- 12% or more, often better than bank FDs. Because of this, many investors find them attractive. However, people often feel unsure about how to buy NCDs. Understanding the process can help you use them wisely and add diversity to your portfolio.
Types of Non-Convertible Debentures
Non-convertible debentures, or NCDs, are debt-based investment options that share many similarities with bonds. Both offer fixed income and are used by companies to raise funds. The key difference lies in security. Bonds are usually backed by assets, while NCDs can be either secured or unsecured. Because unsecured NCDs carry more risk, they often carry higher interest rates than bonds.
NCDs also come in different forms. Some are callable, meaning the issuing company can choose to repay them before maturity. Others are puttable, where investors get the option to exit early if they find better returns elsewhere. These features give both companies and investors more flexibility, depending on market conditions and personal goals.
Also Read: Types of Stock Trading
Benefits of Non-Convertible Debentures
The benefits of investing in NCDs are quite a few, like
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Higher Returns
Non convertible debentures usually offer better interest rates than bank fixed deposits and bonds. Many NCDs offer returns of 10% to 12%, making them attractive to income-focused investors.
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Fixed and Predictable Income
Most NCDs come with fixed interest rates. This helps investors better plan their finances, as income remains stable throughout the tenure.
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Tradable in the Market
These debentures can be bought and sold on stock exchanges. This gives investors liquidity, unlike traditional fixed deposits that lock money for a set period.
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Choice of Secured and Unsecured Options
Investors can choose between secured and unsecured NCDs. Secured ones are backed by company assets, which reduces risk.
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Credit-Rated Instruments
NCDs are rated by agencies. This helps investors judge the safety and reliability of the issuing company.
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Principal Protection
At maturity, investors receive the full principal plus accumulated interest.
Also Check: FD Calculator
Factors To Consider Before Investing In Non-Convertible Debentures
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Credit Rating of the Issuer - A credit rating shows how reliable a company is in repaying its debts. Always choose issuers with higher ratings, such as AA or above, as they are considered safer.
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Debt Level - Review the company’s financial statements to understand how much it has borrowed. A high debt-to-equity ratio may indicate financial stress.
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Capital Adequacy Ratio (CAR) - This ratio indicates whether the company has sufficient capital to absorb unexpected losses. A strong CAR reflects financial stability.
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Provision for Bad Loans - Check if the company regularly sets aside money for non-performing assets. This shows good financial discipline.
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Interest Coverage Ratio - This measures how easily a company can pay its interest. A higher ratio means lower risk for investors.
Conclusion
NCDs are a good investment choice if you prefer fixed income. But since these are unsecured debt tools, risk increases when the company is struggling to perform. However, the chances of default are rare.
Compared with other fixed-rate investment options, NCDs offer a higher return. Overall, if you are considering diversifying your portfolio, reducing risk exposure, and want an assured fixed return, NCDs are a great option. Nowadays, you can buy NCDs online.
