10 May, 2025
6 mins read
Non-Convertible Debentures (NCDs) are gaining popularity in India's investment landscape. They offer you a chance to earn higher interest while keeping risk in check. In this article, we will understand what NCDs are in India, the types of NCDs, their features, and how you can invest in this type of NCD.
NCDs are financial tools that companies use to raise money from the public. When you invest in an NCD, you lend money to a company for a set period. The company promises to pay you interest regularly and return your principal amount when the NCD matures.
The term "non-convertible" refers to debentures that cannot be exchanged for company shares. This distinguishes them from convertible debentures, which can be transformed into shares at a later date. In India, SEBI regulates NCDs. Most NCDs are listed on stock exchanges like the NSE and BSE. This means you can buy or sell them before they mature if you need to.
There are several types of NCDs in India. Each type offers different benefits based on investment needs:
These NCDs are backed by the company's assets. If the company fails to pay you, you have a legal claim on their assets. For example, the company might pledge its land, buildings, or equipment as security. This makes secured NCDs safer for your investment. You'll typically see these offering slightly lower interest rates compared to unsecured NCDs.
These NCDs come with no collateral backing. If the company defaults, you cannot claim any specific assets. This makes them riskier for you as an investor. To compensate for this higher risk, companies usually offer you better interest rates on unsecured NCDs. These are suitable if you have a higher risk tolerance and want better returns.
You can choose NCDs based on how long you want to invest and the offer from the company:
Short-term NCDs: These run for 1-3 years. They work well if you don't want to lock your money for too long.
Medium-term NCDs: These last 3-5 years. They offer a balance between commitment and returns.
Long-term NCDs: These extend beyond 5 years. They typically offer you higher interest rates for your longer commitment.
NCDs also vary by how you receive your interest:
Regular payment NCDs: You get interest payments monthly, quarterly, or yearly. These are great if you need regular income.
Cumulative NCDs: The interest accumulates, and you receive it all at maturity along with your principal. These work well if you want to grow your investment over time.
Listed NCDs trade on stock exchanges. This gives you the freedom to sell them before maturity if you need money. Unlisted NCDs don't trade on exchanges. You'll need to hold them until maturity, but they might offer slightly higher returns. Also, unlisted NCDs are not required to follow all the regulatory needs of a listed NCD.
Understanding these features will help you decide if NCDs fit your investment goals:
Fixed Interest Rate: NCDs offer set interest rates throughout their lifetime. These rates are typically higher than what bank FDs provide. The exact rate depends on the company's credit rating and market conditions.
Tenure Options: You can choose NCDs that last from 1 year to 10 years or more. This flexibility lets you match your investment to your financial timeline. Short-term NCDs work well for near-future goals. Long-term ones can help you build wealth over time.
Tradability: Most NCDs are listed on stock exchanges. This means you don't have to wait until maturity to get your money back. You can sell your NCDs in the secondary market when you need funds.
Credit Rating: Independent agencies like CRISIL, ICRA, and CARE rate NCDs. Credit ratings span from AAA, indicating maximum safety, to D, representing default status. Higher ratings mean lower risk for you, but also usually lower returns. For example, an AAA-rated NCD might offer 7.5% interest, while a BBB-rated one might offer 9%.
Interest Payment Frequency: You can choose how often you receive interest payments. Options typically include monthly, quarterly, annual, or cumulative (at maturity). This lets you align income from your investment with your cash flow needs.
Redemption: At maturity, the issuing company returns your principal amount (face value) either through your bank account or Demat account. Some NCDs also offer early redemption options.
Credit Enhancement: Some NCDs come with additional security measures. These might include insurance coverage or third-party guarantees. These features provide you with extra protection against default risk.
Why might you consider NCDs over other fixed-income options? Here are the key benefits:
Higher Returns: You can earn more from NCDs than from fixed deposits. Well-rated companies typically offer attractive interest rates to attract investors like you.
Regular Income: NCDs can provide you with steady income through interest payments. You can choose to receive these payments monthly, quarterly, or yearly, based on your needs.
Liquidity: Since most NCDs are listed on exchanges, you can sell them when you need funds.
Diversification: Adding NCDs to your investment mix can be smart. They are less volatile than stocks and can help balance your overall risk.
Transparency: SEBI regulates NCDs strictly. Companies must share all important information with you. This helps protect your interests as an investor.
Step 1: Watch financial news or stock exchange websites to find new NCD offerings.
Step 2: Read the prospectus carefully. Check the company's rating, interest rate, tenure, and security status.
Step 3: You'll need a Demat account since most NCDs are issued in digital form.
Step 4: You can apply for NCDs through your stockbroker or bank during the issue period.
Step 5: If you receive NCDs, they will appear in your Demat account. Once listed, you can trade them on the exchange.
Step 6: You can also buy existing NCDs from the market through your trading account.
Interest Income: The interest you earn gets added to your total income. It's taxed based on your income tax slab.
Capital Gains: If you sell NCDs before they mature, your profit is capital gain. If you held them for more than 12 months, it's taxed at 12.5% without indexation. For shorter periods, it's taxed as per your slab.
In conclusion, investing in Non-Convertible Debentures (NCDs) can be a valuable strategy for those seeking regular income and enhanced portfolio diversity. However, it's crucial to conduct thorough research on the company's credit rating and overall financial health to make informed investment decisions. With careful consideration, NCDs can play an effective role in achieving your financial goals.
NCDs from financially strong companies with high credit ratings are relatively safe. Secured NCDs offer you more protection than unsecured ones. Remember that all investments carry some risk.
You might find NCDs suitable if you want higher fixed returns than FDs and can accept moderate risk. They work well if you need regular income and want to diversify your investments.
You can usually start with Rs 10,000, but this amount may change depending on the specific NCD.
Convertible debentures can be transformed into company shares. Non-convertible debentures remain as debt instruments. With NCDs, you only get interest payments and return of your principal amount at the end of the tenure.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
You have successfully submitted your partnership request form. You will be hearing us soon!
Back
