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Non Convertible Debentures

Steady return with the safety of capital is in the minds of all investors. Fixed income instruments such as Bank Fixed Deposits (FDs), Public Provident Funds (PPF), and Non-Convertible Debentures (NCDs) of good Companies provide both. However, each of these instruments is unique in its own way. Taxation, return potential, and lock-in period is different for different instruments. For instance, Bank FDs provide a high level of safety of capital and are significantly liquid in nature. However, annual returns tend to be lower when compared with inflation rates. Similarly, return from PPF is not taxed, but an individual can only invest up to Rs 1.50 lakh per financial year and can withdraw the entire amount after the completion of 15 years. So, if you are considering investing in fixed-income instruments, it is better to weigh all options before committing your money. Taking a decision after weighing only one or two factors may result in a sub-optimal return. From this perspective, NCDs are worth looking at as they become increasingly popular among retail investors. Let’s look at various nuances of these instruments for making a well-informed decision.

Ways to invest in an NCD:

NOTE : Invest through a Demat account: An investor has to open a Demat account with any SEBI-registered broker for investing in NCDs. If you already have one, you can buy NCDs through that account. Public offer of NCDs: The issuer company comes up with a public issue of its NCDs for a subscription. The issue remains open for a certain period of time during which an investor has to purchase the debentures. However, if the NCDs after subscription get listed on the stock exchange, any investor can buy those same NCDs in the secondary market. Such a purchase can be done through a Demat account by the investor.

Checklist for choosing an NCD:

• Credit rating of the company & specific NCDs
• Track record of past issuances
• Overall reputation of the company
• Net profit and revenue
• Profile of top management
• Profile of promoters and shareholding in company
• Assets, liabilities & net worth
• Dividend payout history
• Quality of assets, future growth prospects
• Overall interest rate environment

Investors can look at the following factors before zeroing in on investing in any NCD

Zeroing on the investment period:

When you take the decision of investing in NCDs, you have to consider the timeframe. This will depend on your financial goals- long-term, medium-term and short-term. Suppose, you are investing in NCDs to get regular returns, then you may like to opt for those debentures which provide regular interest over the whole duration. However, if your aim is to generate a higher return through compounding, it is preferable to hold the NCD till maturity. The accumulated interest with capital will generate a better yield than receiving returns at regular intervals. The prevailing interest rate also plays a role in choosing the duration. For instance, in a falling interest rate scenario, you may like to stay invested at a higher rate for a longer period of time. But in the case of rising interest rates, regular returns may generate higher yields.

Reinvest return on NCDs for better yield:

The information in this section is directed at, and is intended for distributionAstute financial planning can generate a higher yield on your investment from NCDs. If you are opting for regular income in NCDs, then the surplus money generated from debentures can be reinvested in liquid mutual funds for generating better returns. Else, if you are looking at locking in the fund in NCDs again, then you can explore NCDs being issued by companies for reinvesting the amount. This way, the return generated will be substantially higher than other debt instruments like bank FDs. If the surplus amount is not adequate to invest in an NCD lot, you can reinvest the surplus money in publicly-traded NCDs. You can place such orders through your broker. Such financial management will ensure higher returns than deposits of lower interest rates. to, and use by, residents of India only. Residents of countries other than India are not authorized to view or use the information in this section. Viewing this information may not be lawful in certain jurisdictions. In other jurisdictions only certain categories of persons may be allowed to view this information. Any person who wishes to view this site must first satisfy themselves that they are not subject to any local requirements which prohibit or restrict them from doing so. If you are not permitted to view materials on this website or are in any doubt as to whether you are permitted to view these materials, please exit this webpage.

Secure your financial future

Your family will be financially secure when you take investment decisions wisely. Instruments that provide safety of capital with good growth potential can help in achieving a better future by achieving your financial goals. NCDs with a high credit rating from a stable of reputed companies provide good options to garner sound returns and diversify your investment portfolio. This, in turn, leads to a better financial future

Information sources for NCDs and issuing companies

• Prospectus of NCD
• Credit Rating rationale provided by credit rating agencies
• Annual Reports & Investor Presentations
• Stock exchange for listed NCDs
• Company’s website
• News sources like financial dailies, business news channels