Investing in the financial market requires careful consideration of various instruments, each offering unique benefits. Non-convertible Debt Instruments (NCDs) have gained popularity due to their potential to provide stable returns with relatively low risk. Let’s explore the advantages of investing in NCDs and how they can be a strategic addition to your investment portfolio.
What are Non-Convertible Debentures?
NCDs are debt instruments issued by companies to raise capital. Unlike convertible debentures, NCDs cannot be converted into equity shares, which means investors receive a fixed interest over a specified period, with the principal amount returned upon maturity. The popularity of NCDs lies in their ability to offer fixed and higher interest rates compared to traditional savings accounts and fixed deposits.
Key Benefits of Investing in NCDs
Investing in NCDs offers several advantages, making them an attractive option for investors seeking stable and predictable returns. Below are some key benefits:
- Higher Interest Rates: One of the most significant advantages of NCDs is the higher interest rates they offer compared to other fixed-income instruments like fixed deposits. This makes them particularly appealing to conservative investors looking for better returns without the high risk associated with equities.
- Fixed Income: NCDs provide a fixed income stream, making them ideal for retirees or individuals seeking regular income. Interest payments are usually made semi-annually or annually to ensure a steady cash flow.
- Low Risk: While all investments carry some risk, NCDs issued by reputable companies are generally considered low-risk. Investors can assess the issuing company’s credit rating to gauge their investment’s safety. Companies with a high credit rating are less likely to default on their payments.
- Liquidity: Although NCDs have a fixed tenure, they are often listed on stock exchanges, allowing investors to sell them in the secondary market if they need to liquidate their investment before maturity. This feature adds a layer of flexibility and liquidity that many other fixed-income instruments lack.
- Tax Efficiency: Interest earned on NCDs is taxable, but the overall tax liability can be lower than other income forms, depending on your tax bracket. Additionally, capital gains from the sale of NCDs on the secondary market are subject to lower long-term capital gains tax if held for more than a year.
The Role of a Dematerialised Account in NCD Investments
Having a dematerialised account is essential for investing in NCDs. This account lets you hold your NCDs electronically, making transactions smoother and more secure.
A dematerialised account simplifies the buying and selling process and reduces the risk of theft or loss associated with physical certificates. Moreover, holding NCDs in a dematerialised account enables easy tracking and managing of your investments.
Considerations Before Investing in NCDs
While NCDs offer numerous benefits, there are several factors to consider before investing:
- Credit Risk: The safety of your investment largely depends on the creditworthiness of the issuing company. It is crucial to assess the company’s credit rating and financial health before investing in NCDs.
- Interest Rate Risk: NCDs are subject to interest rate fluctuations. If interest rates rise in the economy, the market value of existing NCDs might fall, potentially leading to a loss if sold before maturity.
- Lock-in Period: NCDs have a fixed tenure, and although they can be traded on the secondary market, their liquidity might be lower than equities’. Knowing the lock-in period is essential for planning your investment accordingly.
How to Invest in NCDs?
Investing in NCDs is straightforward and can be done through various channels:
- Primary Market: Companies issue NCDs through public offerings. Investors can apply for these directly through their bank or brokerage firm.
- Secondary Market: NCDs can be purchased or sold on the stock exchange through a dematerialised account. This provides flexibility and allows investors to exit their investments if needed.
- Mutual Funds: Some mutual funds invest in NCDs as part of their portfolio. Investors can gain exposure to NCDs indirectly by investing in these funds.
Conclusion
Investing in Non-Convertible Debentures offers a compelling mix of higher returns, fixed income, and lower risk, making them an attractive option for conservative investors. With the added security and convenience of holding them in a dematerialised account, NCDs can be valuable to your investment portfolio. However, it is essential to consider the associated risks and conduct thorough research before investing. By understanding the advantages and potential pitfalls, you can make an informed decision and enjoy the benefits of a stable and predictable income stream.