Non-Convertible Debentures (NCDs) are popular for people who want to earn a fixed investment return. Unlike some other investments, NCDs don’t require any collateral. Instead, their value depends on the financial strength and reputation of the issuer, usually companies.
Companies use NCDs to gather money from investors for the long term. Big companies especially like using NCDs because they can borrow money at a fixed interest rate.
There are two main types of debentures:
- convertible
- non-convertible.
Convertible debentures allow you to exchange them for shares in the company after a set time.
NCDs, however, don’t give you that option.
In this article, you will understand how NCDs work, factors to consider before investing, and much more, so let’s begin!
How do Non-Convertible Debentures Work?
Non-convertible debentures, often abbreviated as NCDs, are fixed-income securities issued by corporations or companies to raise capital from investors. Unlike convertible debentures, which can be converted into equity shares later, NCDs cannot be converted into equity shares. Instead, they offer investors a fixed interest rate for a specified period and the repayment of the principal amount at maturity.
1. Issuance:
Companies issue NCDs to raise funds for various purposes, such as expansion projects, working capital requirements, or debt refinancing. Investors can participate in NCD offerings by subscribing to the issue through designated channels, such as stock exchanges or financial institutions.
2. Interest Payments:
They offer investors a fixed rate of interest, known as the coupon rate, payable at regular intervals, typically semi-annually or annually. The interest income earned from NCDs provides investors a steady income stream, making them attractive to those seeking regular cash flows.
3. Maturity and Redemption:
NCDs have a specified maturity period, ranging from a few months to several years. At the end of the maturity period, investors receive the principal amount invested, the face or par value, and any final interest payment. This redemption feature clarifies the duration of their investment and the expected returns upon maturity.
Factors to Consider Before Investing in NCDs
- Credit Rating: Assessing the issuer’s creditworthiness is essential when investing in NCDs. Higher-rated NCDs issued by financially stable companies offer a lower risk of default and may command lower interest rates. Conversely, lower-rated NCDs may offer higher yields but carry a higher risk of default.
- Interest Rate and Yield: Compare the interest rates offered by different NCDs to determine the potential yield on your investment. While higher interest rates may seem attractive, they often come with increased credit risk. Strike a balance between yield and risk based on your investment objectives and risk tolerance.
- Maturity Period: Consider your investment horizon and liquidity needs before investing in NCDs with varying maturity periods. Shorter-term NCDs offer liquidity and flexibility, while longer-term NCDs may provide higher yields but tie up your funds for an extended period.
- Tax Implications: Understand the tax implications of investing in NCDs, including the treatment of interest income and capital gains. Interest income from NCDs is taxable per the investor’s income tax slab rate, while capital gains from selling NCDs may attract capital gains tax.
Exploring the Best Demat Account for NCD Investments
Investing in non-convertible debentures often requires opening a Demat account, a digital repository for holding and transacting securities. Here’s what to look for in the best Demat account for NCD investments:
- Low Fees and Charges: Choose a Demat account provider that offers competitive brokerage fees, transaction charges, and annual maintenance fees. Minimising costs can enhance your overall investment returns from NCDs.
- Ease of Use: Opt for a user-friendly demat account platform that offers intuitive features for tracking NCD investments, viewing account statements, and conducting transactions seamlessly.
- Research and Analysis Tools: Look for a demat account provider with robust research and analysis tools to help you make informed investment decisions regarding NCDs. Access to market insights, bond ratings, and issuer information can aid in evaluating NCD offerings effectively.
- Customer Support: Ensure the demat account provider offers responsive customer support channels, including phone support, email assistance, and online chat services. Prompt and reliable customer support can promptly address any queries or concerns related to your NCD investments.
Conclusion
Non-convertible debentures present a compelling investment avenue for investors seeking stable returns and portfolio diversification. By understanding the basics of NCDs, evaluating key factors before investing, and selecting the best Demat account for NCD transactions, investors can embark on a rewarding journey towards financial growth and wealth accumulation. Remember to conduct thorough research, seek professional advice, and make informed decisions to maximise the benefits of investing in NCDs.
