Investing can often seem tricky, especially with so many options available. One investment vehicle that has garnered significant attention in recent years is non-convertible debentures (NCDs). This guide aims to demystify NCDs, explaining what they are, their benefits and risks, and how to invest in them.
What are Non-Convertible Debentures?
Non-convertible debentures (NCDs) are debt instruments issued by companies to raise long-term capital. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. Companies primarily use NCDs to borrow money from the public, offering a fixed interest rate over a specified period.
Key Features of NCDs
- Fixed Interest Rate: NCDs offer a predetermined interest rate, providing a stable income stream.
- Tenure: The tenure of NCDs can range from one year to up to 20 years.
- Secured or Unsecured: NCDs can be secured, meaning they are backed by the issuer’s assets or unsecured, with no collateral backing.
Benefits of Investing in Non-Convertible Debentures
- High Returns: NCDs generally offer higher interest rates than traditional fixed deposits, making them an attractive option for investors seeking better returns.
- Regular Income: Investors receive regular interest payouts, which can be monthly, quarterly, or annually, depending on the debenture terms.
- Safety and Security: Secured NCDs provide an added layer of safety, as the company’s assets back them. This means that in the event of a default, investors have a claim on the company’s assets.
- Diversification: Adding non-convertible debentures to your investment portfolio helps diversify risk, balancing the potential volatility of stock investments.
Risks Associated with NCDs
- Credit Risk: The primary risk associated with NCDs is credit risk, which is the risk of the issuing company defaulting on its payment obligations. It’s crucial to assess the issuer’s credit rating before investing.
- Interest Rate Risk: NCDs are subject to interest rate risk, meaning their market value can fluctuate based on changes in interest rates. When interest rates rise, the market value of existing NCDs typically falls.
- Liquidity Risk: While NCDs can be traded on the stock trading platform, they may only sometimes be highly liquid. This means you might be able to sell them quickly, affecting the price.
How to Invest in Non-Convertible Debentures?
Step 1: Research
Before investing, it’s essential to conduct thorough research. Look at the issuing company’s financial health, credit rating, and NCD terms. Reputable credit rating agencies such as CRISIL, ICRA, and CARE provide ratings that can guide your decision.
Step 2: Choose a Stock Trading Platform
To invest in NCDs, you must have a demat account with a registered stock trading platform. Popular platforms include Axis Direct, Upstox, and ICICI Direct. Ensure the platform offers a user-friendly interface and robust customer support.
Step 3: Place an Order
Once you have chosen a platform and conducted your research, you can place an order to buy NCDs. These can be purchased through a public issue or the secondary market. During a public issue, NCDs are available at face value, while in the secondary market, they may be traded at a premium or discount.
Step 4: Monitor Your Investment
Monitor your NCD investment regularly to stay updated on interest payments and the issuing company’s financial status. This will help you make informed decisions about holding or selling the NCDs.
Conclusion
Non-convertible debentures offer an excellent opportunity for investors seeking regular income and higher returns. However, like all investments, they come with their own set of risks. You can make informed investment decisions by conducting thorough research, choosing the right stock trading platform, and understanding the tax implications. Diversifying your portfolio with NCDs can provide a balance of safety and returns, making them a valuable addition to your investment strategy.
Invest wisely, and consider your risk tolerance and investment goals before diving into NCDs.
