Despite equity investment grabbing the headlines and sound-bites, it is yet to capture the major population of investors in India. The reasons are not hard to guess. Equity investment is risky. Coupled with weak regulation and poor implementation of standards, equity investment, apart from in few blue chip and few well-governed smaller firms, turns out to be a losing proposition for majority of investors. I am not advocating that investors stay away from equity investment but they should mix their portfolio with right exposure to equity, mutual funds, and debt to achieve a stable return which suits their risk profile.

One of the lesser known and even lesser understood debt instruments is non-convertible debenture (NCD). But before we understand what an NCD is, let’s define convertible debenture. A convertible debenture is a special type of bond that allows holder to change it to equity after a predetermined time. Since this is a bond, it pays you interest rate. Once you convert it to equity, the interest rate is not paid. Instead, you get your returns by dividend if company declares it and price appreciation of equity.

A non-convertible debenture (NCD) is a bond that cannot be converted into equity. Since the convertible debentures can be converted into equity, it offers low interest rate compared to non-convertible debentures that offers higher interest rate.

NCDs can be secured or unsecured. The secured NCDs are backed by assets of the company. In any eventuality when the company is not able to meet its obligation, its assets can be sold to pay off to the bond holders. Unsecured debentures are not backed by any asset. So why would someone invest in NCD. The reason is that they offer better returns.

 

NCD – The new wave

Recently, the market has been flooded by NCDs by various companies. The inflation is high and bank deposit is giving negative returns in real term. At the same time equity has become very risky because of volatility in the market in last couple of months. Even all-weather friendly Gold is skyrocketing.

Sensing the opportunity, companies have come up with NCDs with different variants to attract investors. The other reason is high interest rate charged by banks on loan.

NCDs are low to medium risk depending upon the company that is floating them. This is pretty well suited to investors who do not want to take much risk with their investment. This also offers a much better returns that bank FD and many Government securities.

For example, Shriram City Union offers 11.85% to 12.10% interest on the NCD it floated. The minimum sum required to invest in this is Rs. 10,000. The maturity is anywhere between 3 to 5 years. Rating assigned by CRISIL is AA- which means stable.

There are similar NCDs in the market by Muthoot Finance, Tata Steel, Mannapuram, and many more. Investors are requested to go through their rating, interest rate, past history, and company’s reputation.


NCDs – the product

The tenure of NCDs can be anywhere between 2 years and 20 years. This gives enough flexibility to investors. Moreover, unlike FDs, you do not have to lock your capital for a certain period of time.

NCDs are available in the market and hence trading is not a problem. You can dispose of or buy whenever you want. You may face some liquidity issue for the NCDs which are not highly rated and have not been doing well.

Capital gain tax on NCD is simple. If you sell your debentures before a year, you will have to pay taxes at the same % you fall into. If the debenture is sold after a year, you will pay tax of 10%, if indexation is not done, or 20% if the indexation is done.


Points to keep in mind

The return of NCDs may not be attractive when interest rates are high.

NCDs are relatively safer assets than equity and mutual funds but they are riskier than bank FDs and Government bonds. Banks and Government do not default on their obligation. RBI always comes to help banks in emergency cases and Government prints money to fulfil its obligation in emergency situation. NCDs normally do not default but when things go drastically wrong, they may face problem in paying the investors.

Investors do not find NCDs exciting like equity and mutual funds and hence the number of transactions may be less. This may cause liquidity problem when investors want to sell off. The investor may have to sell at a low price because of low liquidity. This again depends on case to case basis. There are NCDs by stable companies which are pretty liquid.

NCDs are rated by rating agencies such as CRISIL. Investor must take a look at the rating and understand what they mean before they invest in them. Investors should also check the company’s records in meeting its obligation.

Do not invest more than 20% of your investment in NCDs. You should allocate your funds in various instruments such as equity, mutual funds, debt, and money market.

 

Equityfriend – We are there for you

We provide sub broking and advisory services through ICICI Securities and if you need personal assistance and advisory in starting your investment journey please drop a mail at This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it.This email address is being protected from spambots. You need JavaScript enabled to view it.

As we genuinely want you to master the financial/stock market we do not charge any fee for this service.

You may also like

disclaimerDisclaimer

Trading and investing involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. No information available on Equityfriend should be construed as investment/trading tip or recommendation or a warranty of profitable results. All risks, losses and costs associated with investing/trading, including total loss of principal, are completely your responsibility.

No one from Equityfriend Team is a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 and the material on this website are provided for information and analysis purpose only. Equityfriend.com is in no way accountable for your use of the website data.