Non-Convertible Debentures (NCD): Meaning & Types

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Investment#Investment#Finance

People often need to pay more attention to Non-Convertible Debentures (NCDs) investments that can offer investors great returns. They provide an effective way to diversify investments and protect against market volatility. In addition, with NCDs, investors can benefit from steady returns over a more extended period and enjoy tax-saving benefits. This article explores NCDs to help you decide if they are the right choice.

What is NCD?

Non-convertible debentures, or NCDs, cannot be converted into shares or equities. However, you can use these tools to raise long-term funds through public issues by various companies. For NCDs, the lenders get higher interest rate offers. Like any other debentures, these non-convertible debentures also have associated benefits and risks. Below are some of the benefits of NCDs:

  1. High liquidity via the stock market listing.
  2. Tax exemption
  3. Safety to the lender since the issuance is by high-credit rating companies.
  4. Norms laid by RBI
  5. Given at a minimum maturity of 90 days.

What are the Types of Non-Convertible Debentures?

There are two types of NCDs which are mainly secured and unsecured. Here is a brief about them:

  1. Secured NCDs: The NCDs backed by the issuer company's assets are the secured NCDs.
  2. Unsecured NCDs: Many NCDs have no asset backing and are only given depending on a company's creditworthiness.

What are the Characteristics of Non-Convertible Debentures?

Below are some of the features of NCDs that one should consider before planning to invest:

  1. Issuance

Creditworthy companies offer the NCDs through open market public issues, and interested people can buy these non-convertible debentures within a specific period.

  1. Tradable Securities

You can easily trade these NCDs on the stock exchange market.

  1. Credit Rating

NCD debentures are those debentures that credit rating agencies regularly rate. Since any collateral does not back these, the norm says only the creditworthy companies would be eligible to offer these NCDs.

  1. Interest

Interest rate always plays an important role, and in the case of NCDs, it has an inverse relationship with the company offering these. Although the companies offering these are creditworthy, the higher the credit rating of the company, the lower the interest rate. In most cases, there will be a fixed interest rate on NCDs.

  1. Return Rates

There are two ways through which people who have invested in NCDs can earn a return rate. One is growth-based, and the other is interest-based or cumulative opportunities. Compared to unsecured NCDs, secured NCDs could have lower interest rates. In addition, since the company's assets back secured NCDs, they are less risky than the others.

How to purchase NCDs?

Since the issuing company begins the public issue of their NCDs for a limited period, the main question is how to invest in NCD. Once the companies start offering, they get listed on the stock market. After you see that these NCDs list on the stock exchange, you can invest through registered brokers or through a way to access the stock market.

What are the things to consider before investing in NCDs?

The following are some factors you should take into account before investing in NCDs:

  1. Credit Rating of the company

Credit rating tells the credibility of the issuing company that you would be deal. Since NCDs have no option for themselves, it depends on the repaying capacity of the issuer. So, always go for the AA credit rating companies or more.

  1. Debt Level

Please examine the issuing company's financial statement. Check their asset allocation, debt-equity ratio, and other financial aspects before investing.

  1. Capital Adequacy Ratio

CAR, or the capital adequacy ratio, establishes whether the company has sufficient funds to survive losses.

  1. Requirements for Non-performing assets

Check whether the corporation can consistently allocate allowances for its non-performing assets. It will also rely on whether the business can generate enough earnings.

  1. Interest Coverage Ratio

A larger interest coverage ratio is advantageous. This ratio demonstrates how often the company's earnings are sufficient to pay the interest. In addition, it establishes how easily a corporation can pay off its interest debt.

To Sum Up

Most companies offer NCDs for people to invest in fulfilling one of their business requirements by raising money. Since it is about meeting their business objective, knowing and understanding where the companies would invest your hard-earned money is more important. Don't just go with the interest rate you get since other parameters exist to evaluate the returns on these NCDs. Always do a proper calculation by assessing the pros and cons together.

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