Are you searching for an investment option with fixed returns?
As an investor, it is crucial that your portfolio varies and includes various investment options. NCDs, better known as Corporate Bonds, have become increasingly popular over time, but many individuals may still not understand exactly what these securities entail and their similarities or differences with other forms of investments.
Here we are going to talk about the nonconvertible debentures in detail. From its benefits to features, we have it all sorted for you below. So let’s begin and assess if NCDs may be an ideal investment option for you or not.
Non-Convertible Debentures (NCDs) are debt instruments issued by companies to raise funds from investors. It is issued for fixed terms with fixed interest rates that mature and cannot be converted to equity shares of their issuing company.
Investors who purchase NCDs typically enjoy regular interest payments at a fixed rate over the term of the Debenture. This makes NCDs an appealing investment choice for investors seeking predictable returns.
NCDs may be issued both publicly and privately and rated by credit rating agencies based on the issuer's creditworthiness. These ratings help investors assess risk before making their investment decision.
Here are three types of Non-Convertible Debenture that you must have an idea of before investing:
1. Secured NCDs: When it comes to Secured NCDs, it is acknowledged as debentures that are secured against company assets as collateral.
2. Unsecured NCDs: Without collateral backing, unsecured NCDs represent a riskier investment option. However, their returns tend to exceed the secured NCDs due to being issued based on each company's credit rating and financial strength.
3. Callable NCDs: Callable NCDs are those which can be called back prior to the maturity date by their issuer if they wish to repay early than planned.
4. Non-Callable NCDs: Non-Callable NCDs cannot be called back by their issuer before the maturity date. Their issuer does not have the option to redeem these NCDs early.
5. Convertible NCDs: Convertible NCDs are those which can be converted to equity shares of an issuing company after a certain time has lapsed.
Here are features of non-convertible debentures you must keep in mind before making your decision:
1. Fixed Interest Rates
One major advantage of NCDs is their fixed interest rates, making them an effective way of guaranteeing returns from investments over their duration. You will know exactly how much interest will accrue over its lifespan.
2. Fixed Tenure
NCDs come with fixed tenures, meaning you know exactly when you will receive interest payments and when your principal amount will be returned back to you - can be perfect for investors seeking an established investment horizon.
3. No Equity Ownership
In contrast with convertible debentures, which may be exchanged for equity shares of a company at any point in time, NCDs do not confer any equity ownership and consequently do not confer voting rights or ownership stake in the said business.
4. Tradable On Stock Exchanges
NCDs can often be traded on stock exchanges, giving investors easy and flexible investment solutions. Having these securities readily tradable provides both liquidity and flexibility in portfolio planning.
5. Credit Rating
Nearly all NCDs come equipped with a credit rating from an external agency that assesses their issuer company and offers investors an accurate indication of risk and return in each investment opportunity.
Below are the factors that you must consider checking twice before proceeding ahead with NCDs:
1. Interest Rates
An important element when investing in non-convertible debentures (NCDs) is their interest rates. However, it is wise to assess both return potential as well as risk.
2. Credit Rating
A better issuer credit rating (AAA being the highest) indicates lower risks of default for investors. Before making your NCD investments, it is wise to investigate and confirm they have met all financial obligations as required by investors.
Liquidity refers to how easily an investment can be purchased or sold without impacting its price, making NCD investing especially susceptible.
4. Tax Implications
NCD investments can have tax repercussions that need to be carefully considered prior to investing. Any income earned on NCDs is considered taxable income and needs to be factored into your investment strategy.
5. Maturity Date
NCDs offer investors a maturity date that determines when issuers will repay the principal amount of investments to investors.
6. Market Conditions
Market conditions have an influence over NCD investments. Rising interest rates could reduce their value over time and reduce any return you see from them.
While NCDs offer investors a fixed return, there can be risks involved when investing. Here we outline a few risks involved with investing in non-convertible debentures (NCDs).
1. Credit Risk
A significant threat associated with NCDs is credit risk. This involves the possibility that their issuer might fail to fulfil its payment obligations, should that happen, and investors lose all or part of the investment they had made on that NCD, including principal and interest payments due.
2. Liquidity Risk:
They are less liquid investments than a well-traded stock. Consequently, investors who need cash quickly may find it challenging to sell off their NCDs before maturity if needed.
3. Interest Rate Risk
NCDs are fixed-income securities that offer fixed returns at their time of issue; should interest rates rise after their issuance, their fixed yield could become less enticing to investors and cause them to reduce investment returns significantly.
4. Inflation Risk
Inflation risk refers to the possibility that inflation erodes purchasing power of investments like NCDs; should inflation increase, their fixed returns may no longer keep pace with the increasing cost of living expenses.
5. Market Risk:
Market risk refers to the possibility that the value of an NCD may change with changes in market conditions - this could include factors like interest rate fluctuations, economic conditions, or political events - potentially altering its worth and leading to possible fluctuations.
1. SEBI Guidelines
To protect investors, SEBI has issued guidelines on non-convertible debentures (NCDs), such as disclosure requirements and monitoring issues financials. These regulations detail requirements such as disclosure, credit rating, and monitoring of the issuer's financials.
2. Credit Rating
A key part of investor protection lies with credit ratings. SEBI mandates issuers obtain one from an approved rating agency so as to provide investors with an independent assessment of an issuer's ability to repay NCDs timely.
3. Disclosure Requirements
Issuers must disclose all pertinent details surrounding an NCD offering, such as terms and conditions, credit rating, use of proceeds, and financials - to give investors full access to relevant data before investing. This ensures investors receive accurate advice before purchasing NCDs.
4. Listing on Stock Exchanges:
SEBI has mandated that NCDs must be listed on recognized stock exchanges to provide investors with liquidity and transparency, as the prices and trading volumes for NCDs can be seen publicly. This offers investors access to liquidity as their investments become available for public scrutiny.
Non-convertible debentures offer companies seeking long-term capital reliable long-term capital without conversion options into equity shares. While they do not feature interest rate guarantees or maturity dates like convertible debentures do.
Overall, non-convertibles make an essential financial tool used both by companies as well as investors - potentially creating an advantageous situation all around for all involved! If you desire to make an investment in NCDs (Corporate Bonds), sign up on Grip now and explore corporate bonds!
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Disclaimer: This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer-related documents carefully.