What are Non-Convertible Debentures (NCDs)?

Looking for stable returns beyond traditional options? Let’s decode Non-Convertible Debentures (NCDs). These are debt instruments companies use to raise funds, offering fixed interest payouts without the option to convert into equity. Unlike convertible debentures, NCDs are repaid in full at maturity, making them a go-to for investors craving predictable income. With interest rates often beating bank FDs, NCDs are perfect for diversifying portfolios while chasing better yields.

Types of NCDs

NCDs come in two primary categories, depending on security and payout style:

Secured vs. Unsecured NCDs

1. Secured NCDs: Backed by the issuer’s assets—like a safety cushion if the company hits a rough patch.
2. Unsecured NCDs: No collateral, but they sweeten the deal with higher interest rates to balance the risk.

Interest Payout Options

1. Fixed-Rate NCDs: Lock in a steady interest rate for the entire tenure.
2. Floating-Rate NCDs: Rates move with market benchmarks—ideal if you’re betting on rising rates.
3. Cumulative NCDs: Interest compounds and is paid as a lump sum at maturity.
4. Non-Cumulative NCDs: Get regular payouts (monthly/quarterly/annually) for immediate cash flow.

Your pick depends on whether you prioritize safety, liquidity, or income frequency!

Key Features of Non-Convertible Debentures (NCDs)

• Fixed Returns: Regular interest payments ensure a stable income stream.
• Credit Ratings: Agencies like CRISIL or CARE grade issuers, helping you gauge risk (AAA = safest, D = default risk).
• Liquidity: Listed NCDs can be traded on exchanges like NSE/BSE, offering exit flexibility.
• Tenure: Ranges from 1–10 years, letting you match investments with financial goals.
• Taxation: Interest is taxed as per your slab—factor this into your returns!

Who Can Invest in Non-Convertible Debentures (NCDs)?

• Whether you’re a retail investor, a corporate treasurer, or managing a mutual fund, NCDs fit multiple profiles:
• Retail Investors: Want better FD-like returns? NCDs offer higher rates with moderate risk.
• HNIs: Diversify your fixed-income portfolio beyond bonds and deposits.
• Institutions: Pension funds, insurers, and mutual funds often park funds in high-rated NCDs.
• Corporates: Deploy surplus cash into short-term NCDs for better yields.

Investors must assess their risk appetite and investment horizon before investing in NCDs.

How to Buy NCDs?

Investors can purchase NCDs through:

• Primary Market: Apply during a public issue via your broker or online platforms.
• Secondary Market: Buy/sell listed NCDs on stock exchanges (NSE/BSE) through a Demat and trading account.

To invest, individuals need a Demat account and a trading account with a brokerage.

Factors to Consider Before Investing in NCDs

• Issuer’s Credit Rating: Higher ratings (AAA, AA) mean lower risk but lower returns. Lower ratings (BB, C) offer juicier yields but demand caution.
• Liquidity: Check trading volumes—illiquid NCDs can trap your money until maturity.
• Interest Rate and Payout Frequency: Need monthly income? Opt for non-cumulative. Saving for a goal? Go cumulative.
• Tax Implications: Interest earned is taxable; consider post-tax returns before investing.
• Tenure: Ensure the lock-in period aligns with your financial goals.

Benefits of Non-Convertible Debentures

The benefits of non-convertible debentures include:

• Higher Returns: NCDs generally offer better interest rates than bank fixed deposits.
• Diverse Tenures: Available across different maturity periods to suit varied investment needs.
• Regular Income: Non-cumulative NCDs provide periodic payouts, making them ideal for retirees.
• Market Tradability: Listed NCDs can be traded, ensuring liquidity.
• Security (For Secured NCDs): Asset backing provides an additional safety net.

Conclusion

Non-Convertible Debentures (NCDs) are a neat way to grow your money without the stock market jitters. They’re not perfect—risks vary by issuer and type—but with a little homework on ratings and terms, they can slot nicely into your portfolio. Whether you’re chasing higher returns or a reliable income stream, NCDs might just be your next move.

FAQs

Q: What is NCD?

A: NCD stands for Non-Convertible Debenture, a debt instrument issued by companies to raise capital.

Q: How is an NCD different from a bond?

A: NCDs are specific to corporate issuers and cannot be converted into equity, whereas bonds can have different structures, including convertibility options.

Q: What is non-convertible debenture?

A: These are fixed-income instruments issued by corporations that do not have an option to be converted into equity.

Q: What are non-convertible debentures?

A: They are fixed-income securities that pay periodic interest and must be redeemed by the issuer at maturity.

Q: What are NCD?

A: These are non-convertible debentures that provide fixed returns and are issued by companies to raise capital.

Q: How to buy NCD?

A: You can buy NCDs through the primary or secondary market via a Demat account and a trading account with a brokerage.

Q: Who can invest in non-convertible debentures?

A: These are suitable for retail investors, high-net-worth individuals, institutional investors and corporate entities.

Q: What are the types of non-convertible debentures?

A: These include secured and unsecured NCDs, as well as fixed-rate, floating-rate, cumulative and non-cumulative options.

By understanding the nuances of non-convertible debentures, investors can leverage them for steady returns while managing associated risks effectively.

Disclaimer : Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.