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NCD (Non Convertible Debentures) – Who can invest?
Many of us recently saw few NCD (Non Convertible Debentures) in the market which are offering you the higher interest rate than typical Bank FDs or Debt Funds. Who should invest in such NCD (Non Convertible Debentures)? What are the risks involved in such NCD (Non Convertible Debentures)? Let us see these in detail.
There are NCDs like DHFL or JM Financial NCDs which are offering more than 9% return to you. However, currently, banks are offering you the FDs at around 7% interest rate. How can they offer such high-interest rate and what are the risks involved here?
In case unsecured debentures, if the company goes bankrupt, then you will get the money when all such secured debtors amount is paid back. Hence, unsecured debentures are risky than secured and also because of such risk they offer higher interest rate to you than the secured.
A CALL option means the company has an option to ask the investor to surrender the debenture after a certain period to them. In such situation, the company will pay back the principal to you.
These are good if you are looking for a constant stream of income. Do remember that few NCDs offer you to return interest and principal at maturity itself. Hence, in such situation, they act like typical FDs for you.
These NCDs are listed in stock exchanges. Hence, in case of liquidity, you can sell it in the secondary market.
Interest will be directly credited to your bank account. Hence, ease of managing money.
Credit Rating-Never trust the current credit rating and jump into investing. Credit rating may change at any point of time based on company's financials. Hence, beware of credit rating.
Liquidity-Even though such NCDs are listed in secondary market (like BSE or NSE), they are very thinly traded. Hence, you may face the liquidity issue.
Post Tax Returns-Always check for post-tax returns on the interest you will receive. The formula to calculate the same is given below. Hence, a 9% NCD may not be same for 10%, 20% or 30% tax slab individuals.
Why company need the money-Check why they need the money? Why they are offering you higher interest rates than Bank FDs. If it is not possible to gauge the same by you, then knock the experts' door and then only invest.
Check Financial Statement-Check financial statement of the company for the like how much % of their total asset the company allocating for unsecured loans, Capital Adequacy Ratio (CAR), how much % of their total asset is set aside for the NPAs (non performing assets) and like interest coverage ratio.
Hope this post will give you the complete picture of NCD (Non Convertible Debentures) details and also makes you informed investor about this product.
I am not sure but she can gift this instrument in your name. Check for the details with your broker.
Kindly provide your thought on investing in this NCD. Concerned on the rating but rates are attractive. Will this lure into capital losses ?
HIGHER returns always come with HIGHER returns or LOWER returns also. Decide as per your risk taking ability.
Thanks Sir. Additional information is till 48 month categories it is Secured NCD & if opted for 84 months then it is Unsercured it seems. So, as it is being Secured , does that mean there will be surity of getting back our invested capital or could there be issues with that as well?
Yes, it is surity that of getting back your invested amount. But if there are issues, the repayment may get delayed.
Thanks a lot Sir. But seems the application is only physical and cannot apply online via ASBA bank or Trading Account.
Yes, the application must be physical but you can hold them in demat format.
Sir, which is more Secure ,Bond or NCD? In my hometown,one NBFC issues Bond and they saying the investing amount will double after 5 years. Expecting your advice!
Hard to say blindly whether they are secured or not also it depends on who is issuing that and how is their financial health.
Who is a debenture trustee? And who can be a debenture trustee?
It is usually company board members create trust to manage this money (as per my knowledge).
Thanks for your views and suggestion. Surely from now onwards I will review each of such NCDs which will come into the market.
Excellent article on NCDs, Thank you.
one more advantage of NCD over company FD's are tax may not cut at source, like company FD's where tax limit is also 5000 INR (interest).