Title: Investment Avenues in India – Bonds and Non-Convertible Debentures (NCDs)
Investors today seek investment options that can efficiently manage liquidity and risks while offering substantial returns. In the Indian financial landscape, debentures have emerged as an attractive choice. Debentures are long-term financial instruments issued by companies, featuring a promise to pay a fixed interest to the investor. They are categorized into two main types: convertible debentures and non-convertible debentures (NCDs). In this blog, we will focus on the latter, exploring the world of non-convertible debentures in India. NCDs, particularly, have gained prominence due to their various attributes, which we’ll delve into.
Non-Convertible Debentures in India
1. Understanding Non-Convertible Debentures (NCDs)
Non-convertible debentures (NCDs) are financial instruments that, unlike convertible debentures, cannot be converted into shares or equities of the issuing company. NCDs offer a fixed interest rate, and their interest rates depend on the company issuing the NCD.
2. Eligible Investors for NCDs
NCDs in India can be held by a wide range of investors, including individuals, banking companies, primary dealers, other corporate bodies registered or incorporated in India, and unincorporated bodies.
3. Conservative Investment Avenue
NCDs are often viewed as a conservative investment avenue. Investors are attracted to them for their fixed interest rates, making them a relatively low-risk option in the complex world of financial investments. The most typical way for companies to secure necessary finances is through borrowing, and NCDs offer an effective method for this purpose.
Investing in NCDs
1. Understanding the Terms
Before investing in NCDs, it is essential to understand the terms set by the issuer. These terms include the coupon rate (interest rate on the NCD), the face value, the maturity date, and various other conditions associated with the issue.
2. Credit Rating
One crucial aspect of investing in NCDs is to consider the credit rating of the issuing company. In India, credit rating agencies, such as CRISIL, CARE Ratings, India Ratings and Research Pvt. Ltd, and ICRA, assign ratings ranging from AAA to D. These ratings reflect the creditworthiness and financial health of the company, making them a valuable resource for investors in evaluating the safety of their investments.
3. Secured vs. Unsecured NCDs
NCDs can be secured or unsecured. In the case of unsecured NCDs, investors rely on the company’s creditworthiness as there is no physical asset or security backing the debenture. On the other hand, secured NCDs are supported by assets that can be liquidated in case of a default. This distinction in security significantly affects the risk associated with NCDs.
Advantages of NCDs
1. Fixed Tenure and Regular Payments
NCDs have a fixed tenure and offer regular interest payments, which can be made monthly, quarterly, semi-annually, or annually, depending on the terms set by the issuer. The principal amount is repaid at maturity.
2. Liquidity and Accessibility
NCDs are listed on stock exchanges, enhancing their liquidity. This means that they can be sold in the secondary market, providing investors with flexibility and accessibility.
3. Attractive Yields
NCDs often offer higher yields compared to other fixed-income investment options, making them an attractive choice for income-oriented investors.
Disadvantages of NCDs
1. Risk Associated with Unsecured NCDs
Unsecured NCDs can be riskier than their secured counterparts as they lack physical assets or security. This higher risk is typically compensated by offering a higher interest rate (coupon rate).
2. Credit Risk
Investors in NCDs, especially unsecured ones, should be aware of credit risk. This risk arises from the issuer’s inability to meet interest and principal payments due to weakening creditworthiness.
3. Interest Rate Risk
Non-convertible debentures are also exposed to interest rate risk. When interest rates rise, the market value of existing NCDs falls, and vice versa. This means that existing NCDs might lose value if new NCDs with higher yields enter the market.
Non-convertible debentures are an appealing investment avenue in India, offering a stable source of income with varying degrees of risk. Before investing in NCDs, it is crucial to evaluate the terms, credit ratings, and security type to align the investment with your financial goals and risk tolerance. While NCDs can provide attractive yields, prudent investors should diversify their portfolios and consider the broader financial market conditions and trends when making investment decisions.
Nitin Narkhede CEO Prosperity Lifestyle Hub