What is NCD?

Non-Convertible Debentures (NCDs) are a popular investment option for individuals and organizations looking for fixed-income securities. These financial instruments provide investors with a stable and predictable income stream, making them an attractive choice in both volatile and stable market conditions.

Non-convertible Debentures Meaning

Non-convertible debentures refer to debt instruments issued by corporations or government entities to raise capital from investors. They offer a fixed interest rate (coupon rate) and have a predetermined maturity date when the principal amount is repaid to the holders.

Characteristics of Non-Convertible Debentures

1. Fixed Income: NCDs provide investors with a fixed rate of interest over the tenor of the debenture. This fixed income feature makes them attractive for risk-averse investors seeking stable returns.

2. Tenor and Maturity: Non-convertible debentures have a specified tenor, which can range from a few months to several years. At the end of the tenor, the issuer repays the principal amount to the debenture holders, along with any outstanding interest.

3. Credit Rating: NCDs carry credit ratings. They are based on the issuer's creditworthiness. Higher-rated debentures are considered less risky, but they usually offer lower coupon rates compared to lower-rated ones.

Types of Non-convertible Debentures

1. Secured NCDs - Secured NCDs are backed real estate or other assets. These act as collateral. The issuer must prioritize repaying these loans before settling any other debts or fulfilling interest obligations owed to bondholders.

2. Non-secured NCDs - Unsecured NCDs lack asset or collateral support. Instead, their repayment depends solely on the creditworthiness and capability of the issuer to fulfill their obligations to investors in case of any adverse circumstances affecting business operations. For instance, a decline in profits would impact their ability to make timely interest payments without defaulting on their commitments.

Benefits of Non-Convertible Debentures

1. Regular Income: NCDs offer investors a predictable and steady income in the form of regular interest payments. This can be beneficial for retirees or individuals seeking a consistent income stream.

2. Diversification: Investing in NCDs can help diversify one's investment portfolio by adding fixed-income securities to the mix. This diversification strategy can potentially reduce overall investment risk.

3. Liquidity Options: As NCDs are on stock exchanges, you can sell them before maturity. This liquidity feature ensures that investors have an exit route in case they need to liquidate their investment.

4. Higher Returns: Non-Convertible Debentures generally offer higher interest rates than traditional fixed-income instruments. This makes them an attractive investment option for those seeking better returns on their investments.

5. Beneficial to Those With Specific Obligations: The fixed income feature of NCDs can be advantageous for individuals and organizations with specific financial obligations. For example, retirees who rely on their investment income to cover living expenses find NCDs appealing due to their reliable and consistent income. Similarly, institutions or entities with fixed liabilities, such as pension funds or insurance companies, can benefit from the stable returns offered by NCDs to meet their long-term financial obligations.

Risks Associated with Non-Convertible Debentures

1. Default Risk: There is a possibility of default if the issuer fails to meet its payment obligations. Therefore, it is crucial to consider the creditworthiness and track record of the issuing company before investing in NCDs.

2. Interest Rate Risk: NCDs are prone to interest rate changes. If interest rates rise, the market value of existing NCDs may decline, making them less attractive to potential buyers.

Should You Invest?

Non-convertible debentures offer you a fixed income stream, diversification opportunities, and potentially higher returns compared to traditional investment options. However, there are certain things you need to consider before investing in NCDs. These are -

• Creditworthiness of the Issuer

One of the crucial factors to assess before investing in NCDs is the issuer's creditworthiness. It is essential to evaluate the financial health, track record, and repayment capability of the company issuing the debentures. Consider reviewing the issuer's credit ratings provided by recognized credit rating agencies to gauge the risk associated with the investment.

• Coupon Rate and Yield

Another important consideration is the interest rate and yield offered by the NCDs. Compare the coupon rate (fixed interest rate) provided by different issuers to identify competitive returns. However, it is crucial to balance the yield with the issuer's creditworthiness. Higher yields may come with higher risk, so investors should carefully assess the risk-reward trade-off.

• Tenor and Liquidity

Consider the tenor (maturity period) of the NCDs and align it with your investment objectives. Shorter tenors offer quicker access to the principal amount, while longer tenors provide stable income over an extended period. Additionally, check if the NCDs are listed on stock exchanges, as it provides liquidity options in case you need to sell your debentures before maturity.

You can invest in a range of NCDs through your Kotak Securities trading account. The investment process is the same as that of shares. Seamless and hassle-free, Kotak Securities allow you to invest in different NCDs across tenors.

In Conclusion

Incorporating NCDs into a diversified investment portfolio can help balance risk and enhance potential returns. By conducting thorough research and due diligence, you make informed decisions regarding NCD investments and align them with your financial goals.