Investors looking to earn a fixed and an assured income on their investments are falling short of good investing options. Bank fixed deposits, a popular investment for a long time now, is currently offering interest rates of around 6 per cent on deposits ranging from 1 to 10 years. Interestingly, the inflation is hovering around 5-7 per cent annually thus keeping the real rate of return in almost negative territory.
In such a low interest rate environment, another investment option that appeals to investors is the non-convertible debentures (NCDs). NCDs are issued by corporates to raise funds from the public and offer a fixed return generally higher than what is available to investors from bank fixed deposits. NCD is almost similar to a bond and thus is a debt investment where the investor’s money is not put into the stock market.
While the interest rate in them is high, along with the inherent risk, there are a few other things to know about them before investing.
Key features of non-convertible debentures and how to buy NCDs
NCDs are issued by corporates to raise funds from the public
Offer a fixed return generally higher than bank fixed deposits
Listed on stock exchanges but liquidity could be low in them
Interest income gets added to one’s income and taxable as per income slab
High rated NCDs may offer low or competitive rates than with lower ratings
Some NCDs issues may be secured while others may be un-secured in nature
Monthly, quarterly, half-yearly, annual, cumulative options on interest payouts
To apply, one may visit issuer’s website or one’s demat account
Tenure: The tenure of investment in NCDs may range from around 12 months to as long as ten years. For shorter periods, the rate of interest offered is mostly lower than that offered on longer duration debentures. One may either stagger investment across various tenures or stick to shorter duration to manage risks in NCDs.
Interest Payouts: NCDs may offer monthly, quarterly, half-yearly, annual and cumulative options on interest payouts. Choose as per one’s regular income needs but keep the taxation into context while selecting the option. The interest income gets added to one’s income and is fully taxable as per one’s income slab. If you hold the debentures in demat form, there will not be any deduction of TDS, else, if the annual interest exceeds Rs 5,000 in any financial year, there will be incidence of TDS.
Liquidity: The liquidity in NCDs may be less and may often come at a price. Although NCDs are listed on stock exchanges, investors may not get the right price by selling there as liquidity could be low. If you are willing to hold NCDs till maturity, then only apply for them.
Safety: As far as safety of investment in NCDs is concerned, the ratings play a key role to define the riskiness. Ratings of NCDs issued reflect the position of the issuer in servicing its financial obligations i.e. to pay interest when due and also about the payment of the maturity proceeds on time. Highly rated NCDs may offer low or competitive rates while those which have lower ratings may offer higher interest rates to investors. Ratings essentially reflect the financial position at a certain point of time when the rating exercise is conducted, therefore, investors should remember that the financial position may change over time.
Some NCDs issues may be secured while others may be un-secured in nature. In case of secured NCD, the claims of the Secured NCD Holders shall be superior to the claims of any unsecured creditors as the former would constitute secured obligations of the company. The unsecured NCDs are subordinated and are not secured by any charge on the assets of the company and will be subordinate to the claims of all other creditors. Therefore, secured NCDs may carry a little lower rate than the unsecured NCD within the same issue.
How to buy NCDs
You may directly visit the issuer’s website and can apply from there by making online payment, if such is made available for the investors. Also, if you already have a demat account with any brokerage such as ICICI Direct or HDFC Securities, you can apply from there online. Further, the issuers of NCDs have centers at which the designated intermediaries such as brokers, registrar agents are allowed to accept the Application Forms in physical form. For applying in NCDs, one can submit the ASBA Forms (including ASBA Forms under UPI in case of UPI Investors) to a Registered Broker as well.One may also buy NCDs from the secondary market once they are listed on stock exchanges.
What to consider before investing in NCDs
If the NCDs are offering interest rates much higher than the market or similar competitive NCDs available, they may be considered to carry a higher risk. Choose to go with established and reputed companies rather than merely choosing to go with high interest rate NCDs. Lastly, make sure to read the risk factors in the NCDs prospectus before investing in them. Knowing the risk in advance will help you make a better informed investment decision.