NCDs are issued by companies to raise money from the market. Just as companies raise money through IPOs, they also raise money through NCDs.
Non Convertible Debenture or NCD: Non-Convertible Debentures are an option for investors who want to earn more interest than traditional fixed income options like Fixed Deposits, National Savings Certificate, etc. For companies, NCD has become a trending option to raise money due to which they are issuing NCDs regularly.
This has attracted investors as NCDs offer returns of 8.5 per cent to 9.5 per cent per annum on 5 to 10-year schemes. But the question to ask here is whether is it safe to invest in NCDs as it is in FDs or NSCs. Before that let us understand what is an NCD.
When a company raises money through NCD, it takes it as a loan. Therefore the company has to pay interest on the loan taken. NCDs have a fixed maturity date and investors get returns with a fixed interest rate.
For example, a company has issued an NCD in which you invest.
The company gives you interest at a fixed rate on the money you invest in it. The company needs money, so the interest given to you is also higher. NCDs have different maturity periods and different interest rates are fixed for them.
Secured and Unsecured NCD
There are two types of NCDs:
The first is secured NCD, in which the company has security. That means, if the company is not able to pay their money to the investors, then the investors can recover their money by selling the assets of the company.
The second type of NCD is unsecured NCD. There is no company security in this. This means that if the company is not able to return its money to the investors, then it may be difficult for the investors to get their money back. Unsecured NCDs are more risky than secured NCDs.
Features of NCD
Corporate companies issue NCDs to raise debt which cannot be converted into equity.
Its maturity date is fixed in advance and interest is paid in a lump sum at the time of maturity on a monthly, half-yearly and yearly basis. Money can be invested in this for up to 10 years.
Most NCDs are issued in multiples of Rs 1000.
All NCDs are listed on the exchange, so investors can invest not only directly in the company but also through the secondary market.
The better the rating, the more security: ICRA and CRISIL or other rating agencies issue ratings based on research on non-convertible debentures issued by the company. If a company has a good rating then it is a better option than one with a weak rating. However, rating is not a guarantee that the company will perform well in future. Many types of ratings are issued by rating agencies.
AAA/Stable
AA+/Stable
A+/Stable
A/Stable
AA-/Negative
BBB-/Stable
Things to Keep in Mind
Before investing in the NCDs of any company, understand the strengths of that company. Understand the business model of that company and how sustainable it is going to be in future. Check the company's product portfolio, is it strong and how much innovation potential does that company have? Whether its business is diversified or not. If the business of the company is diversified, then the risk for investors in such companies is less.
Before investing money in an NCD, find out whether the NCD is secured or not. If you invest in secured NCDs, investors get the right to recover the money by selling the assets of the company. There is no exemption on investment in NCDs under Section 80C of the Income Tax Act, 1961. Short-term capital gains tax as per income tax slab is payable on sales before one year and long-term capital gains tax of 20 per cent with indexation benefit on sales thereafter. Apart from this, the same tax is payable on interest received on NCD as on FD.