In the realm of investment opportunities, striking a balance between risk and return is paramount for investors, especially in a dynamic market like India. Among the myriad options available, Non-Convertible Debentures (NCDs) stand out as a compelling choice for those seeking fixed-income instruments with potentially high returns and relatively lower risk profiles. In this exhaustive guide, we delve deep into the intricacies of NCDs, elucidating their nature, advantages, risks, and their role in an investor’s portfolio.
Understanding Non-Convertible Debentures (NCDs):
Non-Convertible Debentures (NCDs) represent debt instruments issued by corporations to raise capital from the public. Unlike convertible debentures, which can be converted into equity shares of the issuing company, NCDs do not offer such conversion privileges. Instead, they provide investors with a fixed rate of interest over a predefined period, coupled with the repayment of the principal amount at maturity.
Benefits of NCDs as Investments:
- Fixed Returns: NCDs furnish investors with a predetermined fixed rate of return, bestowing predictability and stability in income streams. This feature renders them an appealing avenue for individuals seeking fixed-return investments in India.
- High Returns: NCDs often boast higher interest rates compared to traditional fixed-income securities such as bank fixed deposits or government bonds. This characteristic positions them as one of the best high-return fixed-income investments in the Indian financial landscape.
- Diversification: Integrating NCDs into an investment portfolio can augment diversification efforts. As they exhibit low correlation with other asset classes like equities or mutual funds, they serve as effective tools for mitigating overall portfolio risk.
- Secured Investment Options: Certain NCDs are secured against specific assets of the issuing company, furnishing an additional layer of security for investors. This attribute solidifies their standing as one of the best safe investments with high returns.
- Short-Term Investment Opportunities: While NCDs predominantly feature longer tenures, options with shorter maturities are also available, catering to investors on the lookout for the best short-term fixed-income investments.
Risks Associated with NCDs:
- Credit Risk: The primary risk entailed by NCDs is credit risk, denoting the likelihood of the issuing company defaulting on interest payments or principal repayment. Investors must conduct comprehensive due diligence on the issuer’s creditworthiness before committing funds.
- Interest Rate Risk: NCD prices display an inverse relationship with prevailing interest rates. A rise in interest rates could decrease the value of existing NCDs, potentially impacting investors aiming to sell before maturity.
- Liquidity Risk: Unlike stocks traded on exchanges, NCDs may encounter liquidity constraints, particularly those issued by smaller firms. Investors may encounter difficulties offloading NCDs before maturity if demand in the secondary market is scant.
How to Invest in NCDs:
- Direct Investment: Investors can directly procure NCDs from the issuing company during the public issue or via secondary market transactions on stock exchanges.
- Mutual Funds: Numerous mutual funds offer NCD schemes, wherein they invest in a diversified portfolio of NCDs on behalf of investors. This approach furnishes diversification benefits and professional management of NCD investments.
- Online Platforms: Several online platforms facilitate the buying and selling of NCDs, granting investors access to a broad spectrum of issuers and tenures.
Factors to Consider Before Investing in NCDs:
- Credit Rating: Assess the credit rating assigned to the NCD by esteemed credit rating agencies like CRISIL, CARE, or ICRA. Higher-rated NCDs typically signify lower credit risk.
- Interest Rate: Scrutinize the interest rates offered by different NCDs and evaluate their alignment with your investment objectives and risk appetite.
- Tenure: Evaluate the maturity period of the NCD and ascertain whether it resonates with your investment horizon and liquidity requirements.
- Issuer Profile: Delve into the financial health, business model, and track record of the issuing company to gauge its capacity to fulfil interest and principal obligations.
- Tax Implications: Familiarize yourself with the tax ramifications of investing in NCDs, encompassing tax deducted at source (TDS) on interest income and capital gains tax on premature sales.
FINZACE’s NCD Offering:
FINZACE, a preeminent financial and Alternative investment platform in India, extends NCDs to investors. FINZACE’s NCDs feature interest rates starting at 12% per annum, disbursed annually and semi-annually. Furthermore, these NCDs are secured against specific assets of the company, endowing investors with a secured investment avenue.
Conclusion:
Non-convertible debentures (NCDs) represent a compelling option for investors in India seeking to diversify their portfolios while pursuing attractive fixed returns. Endowed with benefits like high returns, diversification, and secured investment options, NCDs stand tall as one of the best fixed-return investment alternatives in India. Nonetheless, investors must exercise prudence, meticulously scrutinizing the risks associated with NCDs, conducting thorough due diligence, and aligning investments with their financial objectives. By adeptly navigating the realm of NCDs, investors can harness high-return fixed-income investments while prudently managing risks, thus fostering robust wealth creation endeavours.