Are you looking to diversify your investment portfolio to get higher returns in the long run? If yes, it’s time you consider investing in one of the most popular investment instruments of millennial times, non-convertible debentures (NCDs).
What is an NCD?
In comparison to traditional bank fixed deposits, NCDs are backed with higher interest rate benefits. In fact, non-convertible debentures generally bring much larger returns on your investments in order to beat inflation when pitted against Fixed deposits.
When locked in for a longer time, these provide investors with higher capital appreciation over time. Furthermore, NCDs are closely monitored and regulated by the RBI, making it an even more lucrative investment avenue for investors.
Another noteworthy factor to keep in mind is that NCDs are a way more secure way for investors if you compare them with other investment channels. This is for the simple reason that investors get either first or second charge on the assets of the NCD issuer.
Top Reasons to Invest in NCDs
Here are some of the major reasons why you should be investing in NCDs:
Diversify your portfolio – Stocks are prone to market fluctuations, whereas bonds tend to be more stable. Typically, bonds are loans that you extend to Governments, utilities and companies by buying bonds issued or sold by them. You can invest in stocks and other investments too, but bonds might be reaping better returns for you in the longer run, especially when stocks go down!
Steady Income – Bonds are an ideal income earner for retirees. An investor shall be paid, typically twice a year, unless the borrower defaults. In the case of stocks, companies are not mandated to pay dividends to stocks owners.
Liquidity – If a need arises, bonds can also be converted into cash and put to the investor’s utility in times of contingencies.
Legal Protections – If a company goes bankrupt, bondholders would still be able to claim their money back. In any case, bondholders have a higher priority over shareholders in claiming the company’s assets.
Tax Benefits – Government bonds come with lucrative tax benefits and help to save a lot on income taxes.
Features & Benefits of NCDs
Furthermore, let’s talk about some of the top features and benefits you will get if you choose to invest in NCDs:
High-Interest Rates – NCDs offer great interest rates to investors. The average rates of NCDs in the last few years have scaled up to around 11%. Most NCDs offer annual and cumulative payout
Earn Capital Gains – NCDs are listed on stock exchanges and investors may opt to sell these debentures any time before maturity. In the process, any gains earned through selling in the secondary market are referred to as capital gains. The earnings are however dependent on the interest rate scenario.
Taxability – The interests that any investor earns on NCDs is clubbed with the bond holder’s income and is thereafter taxed at individual marginal income tax rates.
Associated Risks – One must take into consideration the associated risks before investing in NCDs. One of the most pivotal risks is none other than Credit Risk. An investor might not have any recourse if he invests in an unsecured NCD. The other type of risk is the risk of liquidity which deprives investors of exiting before maturity.
It is thus imperative for every investor to check and analyse the factors underlying an NCD investment thoroughly. A company’s financial health and end uses of funds must be scrutinized and a fair rating can testify its credibility. For instance, a reliable non- deposit taking NBFC registered with the RBI.
The NCD issued has an attractive coupon rate of up to 11%. It has options for 26 months, 38 months and 60 months maturity. The minimum application size is ₹10,000. The Issue is rated a BWR AA+|CARE AA STABLE rating, which indicates a high degree of safety regarding the timely serving of financial obligations.
The issue has also proposed for the NCDs to be listed on both NSE and BSE. When the NCDs are listed there is no Tax Deduction at source on interest on NCDs.