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Understanding the Benefits of Non Market Linked Debentures

  • Author: Sri Rakesh Chintapalli
  • 5 min read
  • October 18, 2023
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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 who are looking for stable returns and low-risk investment opportunities, NCDs offer a way to diversify their portfolios. In this comprehensive guide, we will shed light on the benefits of NMLDs and how they differ from MLDs.

What are Non-Convertible Debentures

Fixed income debentures are a type of non-market-linked debenture that guarantees a fixed rate of return to the investor over a predetermined period. These investments offer a predetermined interest rate, giving investors peace of mind and financial stability.

Since NMLDs are issued by corporations or governments to raise capital, they provide investors with a stable and reliable source of income. 

Brief Comparison with MLDs

However, market-linked deposits (MLDs) fluctuate with changes in interest rates, stock prices, and general market conditions. While MLDs have the potential for higher returns, they also come with a higher level of risk. NMLDs, in contrast, emphasises stability and reliability by providing fixed returns, regardless of market volatilities.

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How Do Non-Convertible Debentures Work?

Non-convertible debentures come with a minimum investment amount that differs from issuer to issuer and is predefined in the NCD contract. 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. The issuers also set an interest rate called the coupon rate to detail how much the investors will get as a percentage of their principal amount as recurring interest.

For example: If you have invested Rs 100,000 in an NCD with a 4% coupon rate, you will get Rs 4000 as the interest payment. Nonconvertible debentures are listed on stock markets and distributed on a first-come, first-served basis by the issuing business. NCDs, like bonds, have a maturity date at which the issuer  returns the principal amount to the investors.

Non-Convertible Debentures Types

Secured vs. Unsecured

NMLDs can be classified into two main categories: Secured and Unsecured.

Secured NMLDs offer an extra layer of protection to its investors by being backed by tangible assets or collateral. On the other hand, unsecured NMLDs are not tied to any specific assets and may carry slightly higher risk levels. However, both types offer the benefit of a fixed rate of return.

Convertible vs. Non-Convertible

NMLDs can also be categorised in accordance with their convertibility. Investors who purchase convertible NMLDs have the opportunity to convert their debentures into equity shares of the issuing firm. This provides an opportunity to participate in the potential growth of the company. Non-convertible NMLDs, however, do not offer this option and solely provide a fixed income for the duration of the tenure.

Benefits of Non-Convertible Debentures

Fixed Rate of Return

The assurance of a fixed rate of return is one of the key benefits of NMLDs. This eliminates the uncertainty associated with market-linked investments because investors know exactly how much they will make from their investment, making them an attractive option for investors seeking fixed income investments. The fixed rate provides a sense of security and allows individuals to plan their finances more effectively.

Diversification

Including NMLDs in an investment portfolio can add diversification benefits. Investors can lower the risk of putting all their eggs in one basket by diversifying their investments across a variety of asset classes.  NMLDs provide a stable income stream that complements other potentially higher-risk investments, creating a well-balanced and diversified portfolio.

Tax Benefits

Investors can receive tax advantages from NMLDs. The interest from NMLDs may be subject to lower tax rates or tax exemptions depending on the jurisdiction.  This can significantly enhance the overall return on investment, resulting in higher net earnings for investors. Unlike income received from FDs being subject to TDS, interests received from NCDs are not subject to TDS under section 193 of the Income Tax Act but are taxable at your slab level.  . 

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 with lower risks.

Low Risk

One of the key attractions of non-market-linked debentures is their low level of risk and stable returns. Unlike market-linked debentures, which are subject to market volatility, NMLDs offer a sense of security to risk-averse investors, making NMLDs an attractive option for risk-averse individuals who prioritize stability over potential high 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.

Factors To Consider Before Investing In Non-Convertible Debentures. 

1. Credit Rating Of The Issuer

For details regarding the default risk related to NCDs, evaluate the issuing company’s credit rating. NCDs with higher ratings often have lower yields but lower credit risk.  Thus, it’s recommended to choose those companies with an AA credit rating or more like Assetmonk which offers an IRR of 17%.

2. Capital Adequacy Ratio

Capital Adequacy Ratio (CAR) gauges the company’s capital and sees whether the company has sufficient funds to survive potential losses.

3. Interest Rate Outlook

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

4. Diversification

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

5. Read the Offer Document

To comprehend the features, terms, and conditions of the NCDs, carefully read the offer document, prospectus, and terms and conditions given by the issuer.

Non-Convertible Debentures Vs Other Fixed Income Investments

Investment OptionsInterest RateConvertibilityLiquidityCredit 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. The issuing company begins the public issue of its NCD for a specified period.  Once the company’s requirements are met, the NCD is listed on the stock market.

Companies issue new NCDs as primary issuances, while secondary market activities entail purchasing and selling NCDs that are listed on stock exchanges.  NCD products are available to investors through banks, financial institutions, brokerage firms, and private companies.

Bottom Line

Non-Convertible Debentures (NCDs) provide investors with an opportunity to earn fixed income with attractive interest rates. NMLDs offer a consistent income stream while reducing some of the risks connected with market-linked investments thanks to their fixed rate of return, low risk, tax advantages, and chance for diversification. Understanding the different types of NMLDs and the available investment methods can empower investors to include these instruments in their overall investment strategy.

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. With a minimum investment  of 10 lakhs and an assured IRR of 17 percent, Assetmonk provides exclusive and tailored investment options to its valued clients. Additionally, investors may also be eligible for a potential tax benefit of up to Rs. 50,000.

Related Articles

  1. Non-Convertible Debentures (NCDs) Vs Bonds in India.
  2. Real Estate Debentures 101: Pros & Cons For Investors
  3. Best Short Term Investments With Higher Returns.

FAQs

Q1. What are the benefits of non-convertible debentures?

A. Non-convertible debentures help investors with their good returns, low risk, liquidity, and tax benefits.

Q2. Can non convertible debentures be sold?

A.  Non-Convertible Debentures are typically listed securities; thus an investor can sell them in the secondary market before they reach maturity.

Q3. What is the interest rate on NCDs?

A. The interest rate provided by the NCD issuer is commonly referred to as the coupon rate. Higher interest rates offered by NCDs are a major benefit over bank fixed deposits (FDs). The returns offered by NCDs, which can reach as high as 12%, are significantly higher than those offered by other fixed-income investments. This attractive feature makes NCDs a favored choice among many investors seeking to maximize their investment earnings. 

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