Non-convertible debentures (NCDs), issued by companies to raise funds, have been hitting the market in regular intervals. The most recent proposal is from Tata Motors which plans to get board approval soon to raise Rs 500 crore.
In recent month, some NCDs have been runaway success with huge investment interest. Issues from the likes of Dewan Housing Finance Ltd, which came up with inflation-linked NCDs, and Indiabulls Housing Finance received massive investor response. Along with these, SREI Infrastructure Finance raised funds through this route.
While NCDs from big and established companies are generally safe investments, there may be companies with not-so-strong financials or with dubious background which might jump into the bandwagon and seek to raised funds in this milieu. In such cases, investors’ would run the risk of defaults by the company when the instruments come up for redemption and lose their investment in the process.
So what are the basics steps an investor needs to adopt while deciding to put money in company NCDs?
“NCD’s can be a good investment option, however it is important to understand one’s risk profile and the detailed information related to the NCD, like the credit rating. even an investor who has moderate- to high-risk profile can consider investing in NCD’s if the investor wishes to lock in interest payouts for a longer duration, especially in a falling interest rate scenario,” says investment advisor, Anil Rego, CEO & Founder, Right Horizons, told FeMoney.
Ramganesh Iyer, Co–Founder, Fisdom.com, suggests choosing to invest in secured instruments. “Yields are softening and this could give a downward pressure on fixed deposit and small savings rates. Given this environment, such NCDs offering 9%+ yields are a good option for an investor who is willing to take slightly more risk than a bank fixed deposit. The safety net is improved if the NCDs subscribed to are secured ones. NCDs are essentially a trade-off between the higher risk of default compared to a bank fixed deposit, versus the higher interest rate received,” Iyer said.
Rego and Iyer suggest investors to keep in mind the following 5 factors while investing in NCD:
- Credit rating of the issuer (higher the better): It is important to check the credit rating assigned by rating agencies. Credit ratings help to understand how safe the capital invested will be
- Whether instruments are secured: Whether the NCD is secured or unsecured (secured is better) and the tenure of the NCD (lower is better from a risk perspective).
- Interest rate offered: What would be the payout is one most important aspect to check. what will be the payouts. It will enable to calculate the returns post-tax and inflation.
- Outlook on yield: If investors believe yields are going to trend downwards, it makes more sense to lock in higher rates through an NCD.
- Objective of the issue: Investors should study for what purpose the money is been raised. What should be seen is whether the money be utilised to pay off existing loans or for business purpose or capital investment