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      Demystifying Non-Convertible Debentures (NCDs): A Comprehensive Guide

      • 5 min read
      • Last Modified Date: April 30, 2024
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      Non-Convertible Debentures or NCDs are an increasingly popular investment option.  They are fixed-income investments that offer a fixed income with attractive interest rates. For investors seeking stable returns and an investment avenue with low risk, NCDs provide an opportunity to diversify their portfolios. In this comprehensive guide, we will demystify NCDs, explaining what they are, how they work, their benefits, risks, and key considerations for investors.

      What are Non-Convertible Debentures

      Non-Convertible Debentures or NCDs are instruments that have fixed incomes issued by corporations, financial institutions, or government-backed entities to raise funds from the public. NCDs cannot be converted into stock shares of the issuing company. Instead, they offer an interest rate that is fixed over a certain period, typically ranging from 1 to 10 years.

      How Do Non-Convertible Debentures Work?

      When investors purchase NCDs, they essentially lend money to the issuer in exchange for regular interest payments and the repayment of the principal amount at maturity. NCDs possess a specified coupon rate, which determines the interest income received by investors. Interest payments can be made monthly, quarterly, semi-annually, or yearly, based on the agreements of the NCD.

      Non-Convertible Debentures Types

      Secured NCDs

      NCDs are backed by specific assets of the issuing company, providing an additional layer of security for investors. In case of default, the assets can be liquidated to repay the NCD holders.

      Unsecured NCDs

      Also known as subordinated debentures, NCDs are not backed by specific assets. In case of default, the unsecured NCD holders have lower priority in repayment compared to secured NCD holders.

      Callable NCDs

      Callable NCDs provide the issuer with the option to redeem the debentures before the maturity date. This gives the issuer flexibility in managing debt and can be disadvantageous for investors if the NCDs are called when interest rates are low.

      Benefits of Non-Convertible Debentures

      Regular Income

      NCDs provide a predictable stream of income through regular interest payments, making them an attractive option for investors seeking fixed-income investments.

      Diversification

      NCDs offer an opportunity to diversify investment portfolios, reducing overall risk by allocating funds to different issuers and sectors.

      Higher Returns

      NCDs often offer higher interest rates like 10 percent to 12 percent compared to traditional fixed-income options like bank deposits. FDs offer 7 percent to 8 percent. So, NCDs allow investors to earn potentially higher returns.

      Choice of Tenure

      NCDs come with various tenures, allowing investors to select the maturity period that aligns with their investment goals and liquidity requirements.

      Transparent and Regulated

      NCDs are regulated by regulatory authorities such as the Securities and Exchange Board of India (SEBI) in India, ensuring transparency and investor protection.

      Risks Associated with Non-Convertible Debentures

      Credit Risk

      There is a risk of default if the company issuing fails to make timely interest payments or repay the principal amount at maturity. Investors should assess the creditworthiness of the issuer through credit ratings provided by rating agencies.

      Interest Rate Risk

      NCD prices are inversely related to changes in interest rates. When interest rates rise, existing NCD prices may decline, impacting the value of the investment.

      Liquidity Risk

      NCDs may have lower liquidity compared to other investments. It is important to consider the liquidity of the NCDs before investing, as selling them before maturity can be challenging.

      Market Risk

      NCD prices can be influenced by market conditions and investor sentiment, leading to price fluctuations. Market risk should be carefully evaluated before investing.

      Key Considerations for Investing in Non-Convertible Debentures

      Credit Rating

      Assess the credit rating of the issuing company to understand the default risk associated with the NCDs. Higher-rated NCDs generally offer lower yields but carry lower credit risk.

      Interest Rate Outlook

      Consider the prevailing interest rate environment and future interest rate expectations to gauge the impact on NCD prices and returns.

      Investment Horizon

      Determine your investment horizon and liquidity requirements as NCDs have fixed tenures, and premature withdrawal may incur penalties.

      Diversification

      Spread your investments across multiple issuers, industries, and tenures to mitigate credit risk and achieve a well-diversified portfolio.

      Read the Offer Document

      Carefully read the offer document, prospectus, and terms and conditions provided by the issuer to understand the features, terms, and conditions of the NCDs.

      Non-Convertible Debentures Vs Other Fixed Income Investments

      To better understand the unique characteristics of NCDs, let’s compare them with other fixed-income investments in the following table:

      Investment OptionsInterest RateConvertibilityLiquidity
      Credit Risk
      Non-Convertible DebenturesFixedNon-ConvertibleModerateVaries
      Government BondsFixedNon-ConvertibleHighLow
      Corporate BondsFixedConvertibleModerateVaries
      Fixed DepositsFixedNon-ConvertibleHighLow

      How to Invest in Non-Convertible Debentures

      Investors can invest in NCDs through various channels, including primary issuances or secondary market transactions. Primary issuances occur when companies launch new NCDs, while secondary market transactions involve buying and selling NCDs listed on stock exchanges. Investors can approach banks, financial institutions, or brokerage firms, private enterprises to participate in NCD offerings.

      Bottom Line

      Non-Convertible Debentures (NCDs) provide investors with an opportunity to earn fixed income with attractive interest rates. By understanding the working, benefits, risks, and key considerations associated with NCDs, investors can make informed decisions and effectively diversify their investment portfolios. It is essential to conduct thorough research, evaluate credit ratings, and seek professional advice before investing in NCDs to align them with your financial goals and risk appetite.

      Investing in NCDs requires careful consideration, but it can be a rewarding avenue for investors seeking stable returns and diversification. Begin exploring the world of non-convertible debentures and take advantage of the potential benefits they offer in today’s investment landscape.

      Assetmonk stands out as a prominent alternative investment platform in India, offering individuals the opportunity to invest in fixed-income assets through real estate structured debts. Our real estate structured debt product offers an assured internal rate of return (IRR) of 17.1 percent. Additionally, investors may also be eligible for a potential tax benefit of up to Rs. 50,000. Notably, the investment threshold for this product starts at just Rs. 10 lakhs.

      Related Articles

      1. Non-Convertible Debentures (NCDs) Vs Bonds in India.
      2. Real Estate NCDs – Who Is It For & What Are The Benefits?
      3. Real Estate Debentures 101: Pros & Cons For Investors

      FAQs

      Q1.What is the difference between NCDs and convertible debentures?

      A. Convertible debentures are debentures that have the flexibility to be converted into stock shares of the company. On the other hand, non-convertible debentures refer to debentures that lack the feature of conversion into stock shares of the company.

      Q2. Is it good to invest in NCD?

      A. Non-Convertible Debentures (NCDs) often provide investors with higher interest rates when compared to conventional fixed deposits, presenting an appealing opportunity to generate increased returns on investment. Additionally, the interest rates offered on NCDs remain fixed throughout the investment period, ensuring predictability for investors.

      Q3. What happens to NCDs after maturity?

      A. Non-Convertible Debentures (NCDs) provide investors with an interest rate that is fixed, ensuring stability throughout the investment duration. At the end of the maturity period, investors receive the principal amount in addition to the accrued interest. 

      Q4. What is the disadvantage of NCD?

      A. The disadvantages of NCDs are

      a) Credit Risk: There is a risk of default if the company issuing fails to make timely interest payments or repay the principal amount at maturity. Investors should assess the creditworthiness of the issuer through credit ratings provided by rating agencies.

      b) Interest Rate Risk: NCD prices are inversely related to changes in interest rates. When interest rates rise, existing NCD prices may decline, impacting the value of the investment.

      c) Liquidity Risk: NCDs may have lower liquidity compared to other investments. It is important to consider the liquidity of the NCDs before investing, as selling them before maturity can be challenging.

      d) Market Risk: NCD prices can be influenced by market conditions and investor sentiment, leading to price fluctuations. Market risk should be carefully evaluated before investing.

      Q5.  What is NCD interest rate?

      A. The interest rate provided by the NCD issuer is commonly referred to as the coupon rate. A significant advantage of NCDs over bank fixed deposits (FDs) is the higher interest rate they offer. With returns ranging from 11% to 12%, NCDs provide investors with a considerably higher rate of return compared to other fixed-income options. This attractive feature makes NCDs a favored choice among many investors seeking to maximize their investment earnings.

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