Top 5 Benefits of Non-Convertible Debentures

Non-convertible debentures (NCDs) offer stable returns with lower risk than equities. Companies issue these fixed-income instruments to raise long-term capital, which cannot be converted into equity shares.

This guide will discuss the top five benefits of investing in non-convertible debentures, providing crucial insights for potential investors.

Attractive Interest Rates

NCDs generally offer higher interest rates than traditional fixed deposits (FDs) and government bonds, making them appealing to investors looking to enhance their fixed-income portfolios.

For example, while a bank FD might offer an interest rate of around 5-6% per annum, NCDs can offer rates ranging from 7-10% or even higher, depending on the issuing company’s credit rating and market conditions. 

These higher returns can significantly boost your overall investment income.

Regular Income

NCDs are an excellent source of regular income, especially for retirees and conservative investors seeking steady cash flows. Most NCDs offer periodic interest payments, which can be monthly, quarterly, half-yearly, or annually.

This predictable income stream can help manage day-to-day expenses and achieve financial goals. For instance, if you invest Rs. 10 lakh in an NCD offering an annual interest rate of 8%, you can expect to receive Rs. 80,000 in interest payments each year, distributed as per the payment schedule.

This regular income can provide financial stability and peace of mind.

Lower Risk Compared to Equities

NCDs are backed by the issuing company’s assets, providing investors with a certain level of security. The principal amount invested in NCDs is repaid at maturity, reducing the risk of capital loss.

The interest payments are usually fixed and predetermined, offering a stable return irrespective of market fluctuations. This lower risk profile makes NCDs suitable for risk-averse investors seeking capital preservation and regular income.

Diversification of Investment Portfolio

Including non-convertible debentures in your investment portfolio can enhance diversification and reduce overall risk. Diversification involves spreading investments across different asset classes to minimize the impact of poor performance in any asset.

NCDs add a fixed-income component to your portfolio, balancing the risk associated with equity investments.

Liquidity

NCDs are listed on stock exchanges, providing liquidity to investors. This means you can buy and sell NCDs in the secondary market before maturity. Trading NCDs offers flexibility and accessibility to your invested funds, which is impossible with other fixed-income instruments like fixed deposits.

For example, if you need to access your funds before the NCD’s maturity, you can sell your NCDs on the stock exchange at the prevailing market price. This liquidity feature ensures that your investment is not locked in and can be accessed when needed, providing financial flexibility.

Understanding Debentures Meaning and Investment Strategies

When investing in NCDs, consider the following strategies and tips:

  • Credit Rating: Always check the credit rating of the NCD before investing. Higher-rated NCDs (rated by agencies like CRISIL, ICRA, and CARE) are generally safer, offering a lower risk of default. However, they might offer slightly lower interest rates compared to lower-rated NCDs.
  • Issuer’s Financial Health: Analyse the financial health and stability of the issuing company. Companies with strong financials are likelier to honour their debt obligations, ensuring timely interest payments and principal repayment.
  • Interest Payment Frequency: Choose the interest payment frequency that aligns with your financial needs. Opt for NCDs with monthly or quarterly interest payments if you require regular cash flow. For long-term growth, consider NCDs with annual interest payments.
  • Investment Horizon: Match your investment horizon with the maturity period of the NCD. If you have short-term financial goals, select NCDs with shorter maturities. For long-term goals, longer-maturity NCDs can provide better returns.
  • Tax Implications: Understand the tax implications of investing in NCDs. Interest income from NCDs is taxable as per your income tax slab. Additionally, any capital gains from selling NCDs in the secondary market are subject to capital gains tax. Plan your investments accordingly to optimise tax efficiency.

Mistakes to Avoid When Investing in NCDs

While investing in non-convertible debentures can be rewarding, avoid these common mistakes:

  • Ignoring Credit Ratings: Investing in low-rated NCDs without understanding the risks can lead to potential defaults and capital loss. Always prioritise safety over higher returns.
  • Overlooking Liquidity Needs: Ensure you have sufficient liquidity before investing in NCDs, as premature selling in the secondary market might result in losses if the market price is below the face value.
  • Concentrated Investments: Avoid putting all your money into a single NCD or issuer. Diversify across multiple issuers and industries to spread the risk.

Conclusion

Non-convertible debentures offer numerous benefits, including attractive interest rates, regular income, lower risk compared to equities, portfolio diversification, and liquidity.

Consider adding NCDs to your portfolio today to enjoy these advantages and achieve your financial goals.

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