NCD Full Form-Non Convertible Debenture

Non-Convertible Debentures (NCDs): A Complete Guide to Secure Fixed-Income Investments

Non-Convertible Debentures (NCDs) are debt instruments issued by companies to raise capital, offering attractive interest rates with relatively lower risk than equities. Unlike convertible debentures, NCDs cannot be converted into equity shares and must be repaid to the investor at maturity. They are a popular choice for investors seeking fixed-income securities.

This article explores what NCDs are, their types, benefits, risks, and factors to consider before investing in these fixed-income instruments.

What Are Non-Convertible Debentures (NCDs)?

Non-Convertible Debentures (NCDs) are fixed-income financial instruments that companies issue to raise long-term capital. These debentures come with a fixed tenure and offer periodic interest payments to investors. Unlike convertible debentures, they do not provide an option to convert them into equity shares of the issuing company.

Types of Non-Convertible Debentures

NCDs can be classified into two main categories:

• Secured NCDs:
  • Backed by the issuing company’s assets, offering a legal claim over specific assets in case of default.
  • Considered a safer investment option due to asset backing.
• Unsecured NCDs:
  • Not backed by company assets, making them riskier.
  • Offer higher interest rates to compensate for the increased risk.

Features of Non-Convertible Debentures

NCDs come with distinct characteristics that make them appealing to investors:

• Fixed Interest Rate: Investors receive a pre-determined interest rate over a fixed tenure.
• Tenure: Typically ranges from 1 year to 10 years.
• Liquidity: Some NCDs are listed on stock exchanges, allowing investors to trade them before maturity.
• Credit Rating: Issued by rating agencies to help investors assess the risk associated with a particular NCD.
• Taxation: Interest earned on NCDs is taxable as per the investor’s income tax slab.

Benefits of Investing in NCDs

Investing in NCDs offers several advantages for fixed-income investors:

• Higher Returns: Compared to traditional fixed deposits (FDs), NCDs generally offer higher interest rates.
• Regular Income: Investors can opt for monthly, quarterly, or annual interest payouts, depending on the NCD structure.
• Lower Risk Compared to Stocks: As debt instruments, NCDs carry lower risk than equity investments while offering steady returns.
• Liquidity: Listed NCDs can be traded on stock exchanges, providing an option to sell before maturity.

Risks Associated with NCDs

Despite their benefits, NCDs come with certain risks that investors should evaluate:

• Credit Risk: If the issuing company faces financial difficulties, it may default on interest payments or principal repayment.
• Interest Rate Risk: Rising market interest rates can make existing NCDs with lower rates less attractive, reducing their market value.
• Liquidity Risk: Some listed NCDs may have low trading volumes, making it difficult to exit before maturity.

Factors to Consider Before Investing in NCDs

Investors should carefully evaluate the following factors before investing in NCDs:

• Issuer’s Credit Rating: Check ratings from agencies like CRISIL, ICRA, or CARE to assess the company’s financial stability.
• Interest Rate & Tenure: Compare interest rates across issuers and choose a tenure that aligns with your financial goals.
• Tax Implications: Interest earned is taxable as per your income tax slab; consider post-tax returns.
• Liquidity Needs: Opt for listed NCDs if you might need funds before the maturity period.

How to Invest in NCDs?

Investors can acquire NCDs through the following methods:

• Primary Market: Subscribe to NCDs during public offerings when a company issues them.
• Secondary Market: Purchase listed NCDs through stock exchanges.
• Demat Account: Most NCDs are issued in dematerialized (Demat) form, requiring a Demat account.

Non-Convertible Debentures (NCDs) are an excellent investment option for those seeking higher fixed returns with lower risk compared to equities. However, investors should evaluate credit ratings, interest rates, liquidity, and taxation before making a decision. With careful planning, NCDs can be a reliable addition to an investment portfolio, ensuring steady income and capital protection.

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