NCD - The Investment Your Portfolio Needs

What are NCDs?

NCDs are debts with a defined maturity date that cannot be changed into stock or equity. The interest accrued can be easily paid in yearly, quarterly, or monthly schedules, based on the fixed term selected. When contrasted to convertible debentures, NCDs offer lesser risk, more liquidity, and higher yields and tax benefits to investors.

What are the features of NCDs?

• High Rates of Interest

If kept to maturity, non-convertible debentures can provide high interest, varying from 7% to around 9%. The interest amount is paid out monthly, quarterly, semi-annually, or yearly. Non-convertible debentures also include a cumulative payment option. Furthermore, unsecured non-convertible debentures may have even a higher rate of interest than secured ones.

• Taxation

NCDs have tax ramifications based on the investor's tax bracket. If NCDs are traded within a year of acquisition, short-term capital gain tax at the income tax bracket rate will be applied. If the NCDs are traded after a year of the acquisition or before the date of maturity, long-term capital gain tax at a rate of 20% with indexation will be applied. The interest income of non-convertible debentures is tax-treated in the same way as fixed-income assets, under the head of 'income from other sources'.

• Credit Ranking

Credit evaluation organisations evaluate companies. The credit ranking of a firm is very important in determining its viability. A better credit rating indicates that the firm can meet its credit commitments. On the other hand, a poor credit ranking indicates that the firm faces significant credit concerns. If an issuing firm fails to complete payments, the rating organisations assign it a lower ranking.

What should you consider before investing in NCDs?

• Debt Level

It is advisable to avoid investing in a non-convertible debenture if the firm's unsecured loans represent more than half of its overall asset value.

• Credit Ranking

Credit rankings assess a company's capacity to generate cash through internal and external activities, as well as its long-term viability. It is an ideal metric for determining a firm's financial situation.

• Non-Performing Asset Provisions

A corporation must hold a minimum of half of its overall assets for NPAs since it is a good measure of asset quality. It is recommended to not invest in a company that has poor debts.

• Interest Coverage Ratio

The ICR or Interest Coverage Ratio is a measure of a company's capacity to smoothly settle its loan interests at any particular moment.

• CAR

Capital Adequacy Ratio or CAR assesses the firm's capital and determines if it has enough money to withstand probable losses.

• Tax Bracket

Non-convertible debentures appeal to investors who are in the tax brackets ranging from 10% to 20%. If your existing tax slab is low, you may earn more money in return.

Conclusion

NCDs can be a wonderful addition to your investment portfolio to diversify away from traditional stocks. However, before you invest, be certain that you grasp the points made in this article.