Understanding Non-Convertible Debentures (NCDs)

Non-Convertible Debentures (NCDs) are fixed-income instruments used by companies to raise funds from the public. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. This makes them primarily debt instruments, appealing to investors seeking regular, predictable returns.

Key Features of NCDs:

• Fixed Interest Rate: NCDs typically offer a predetermined interest rate, also known as the coupon rate, which remains constant throughout the tenure. This provides clarity and predictability for investors.
• Fixed Tenure: NCDs have a specific maturity date, ranging from a few months to several years. Investors receive their principal amount back upon maturity.
• Credit Rating: Reputable credit rating agencies like CRISIL, ICRA, and CARE assess the creditworthiness of the issuing company. Higher ratings (AAA being the highest) indicate a lower risk of default. Investors should carefully consider the credit rating before investing.
• Liquidity: NCDs are usually listed on stock exchanges, allowing investors to buy and sell them in the secondary market before maturity. However, liquidity depends on trading volume and market conditions.
• Taxation: Interest earned on NCDs is taxable as per the investor’s income tax slab. Additionally, capital gains arising from the sale of NCDs in the secondary market are also subject to tax.

Advantages of Investing in NCDs:

• Higher Returns Compared to Bank Deposits: NCDs often offer higher interest rates than traditional fixed deposits, making them an attractive option for income-seeking investors.
• Regular Income Stream: The fixed interest rate provides a predictable income stream throughout the tenure of the NCD.
• Relatively Safe Investment: Investing in NCDs with high credit ratings reduces the risk of default.
• Diversification: NCDs can diversify an investment portfolio, reducing overall risk.

Risks Associated with NCDs:

• Credit Risk: The primary risk is the issuer defaulting on interest or principal payments. This is mitigated by choosing NCDs with high credit ratings.
• Interest Rate Risk: If interest rates rise after investing in an NCD, its market value may decline.
• Liquidity Risk: While listed, liquidity can be limited, particularly for NCDs with lower trading volumes.
• Inflation Risk: If inflation exceeds the NCD’s interest rate, the real return on investment may be diminished.

Before Investing:

Thoroughly research the issuing company, analyze its financial performance, and carefully consider the credit rating of the NCD. Understand the terms and conditions, including the interest rate, tenure, and redemption process. Consult a financial advisor to assess whether NCDs align with your investment goals and risk tolerance.

Disclaimer: This information is for educational purposes only and should not be considered as financial advice. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.