Non-Convertible Debentures (NCDs)

Mix of risk and return profile

Non-convertible debentures are used by companies to raise long-term funds through public issues. Via NCDs, a company agrees to pay a fixed rate of interest on your investment for a specified period.

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Non-convertible Debentures are fixed-income instruments offered by large companies for fixed period and interest rates.

Companies issue NCD to raise funds without the option of conversion to equity, mostly to fulfill a business purpose. NCD allotment is based on “First Come First Serve” basis.

There are 2 types of NCD:

  1. Secured NCDs: Secured NCD are backed by company’s assets. In the event of windup of the company, the assets will be sold off against which the NCD was secured and repay the investor.
  2. Unsecured NCDs: Unsecured NCDs are not backed by a company’s assets and are based on creditworthiness of the issuer.
  1. Issuance: Companies provide NCD in open market public issues for a specific period, during which investor can purchase the NCD.
  2. Tradeable in secondary market: NCDs are listed in secondary market, and can be sold before maturity. This provides liquidity to investors.
  3. Credit Rating: NCD are regularly rated by credit rating agencies. Unsecured NCDs are not backed by a company’s assets, and these ratings help investor help choose the correct NCD.
  4. Interest: Interest rates for NCDs for mostly fixed. Interest can be earned monthly / quarterly / annually / cumulative and on maturity principal amount is paid to the investor.

The public issue open for NCD opens for a specific period. During which anyone can purchase NCD and allotment is done on First come First Serve basis. After the public issue closes, the NCD are listed in the secondary market. NCD can be purchased by logging to Kotak Securities’ account.

  1. Credit Ratings: Ratings by agencies like CRISIL, CARE, FITCH, ICRA enables investors to assess the issuer’s ability to raise funds before investment. It’s recommended to invest in NCD with company having credit rating of AA or higher.

  2. Secured vs Unsecured: In the event of windup of the company, the assets will be sold off against which the NCD was secured and repay the investor. Unsecured NCDs are not backed by the issuer’s assets. It’s up to the investor to decide if the risk unsecured NCD meets their risk appetite and deliver their financial goals.

  3. Tenure: NCD’s tenure can be anywhere between 90 days to 20 years. Investors should choose their tenure based on their financial goals and risk appetite.

  4. Interest payout option: Investor can look at different payout options such as monthly, quarterly, half-yearly and annual interest payment depending on their requirement and investment strategy.

  1. Fixed Periodic Income: Helps generate fixed periodic income

  2. Higher returns: Most NCDs provide higher interest rate compared to FD, postal savings and other fixed income instruments.

  3. Easy liquidity: NCDs that are listed can sold in secondary market before its maturity, which provides liquidity to investors. Higher the liquidity, better for investors.

  4. Lower Risk: Only companies with good ratings can issue secured NCD, hence providing low risk to investors.

  5. Capital appreciation: Since NCDs are listed in secondary market, investors can take advantage of fluctuations in stock market, and can sell them at higher cost.

The tenure of an NCD can be anywhere from 90 days to 20 years. The tenure varies for each NCD issue and is decided by the issuer.

The minimum investment is decided by the issuing company and varies with different issues of NCD. The minimum investment for NCD is usually Rs. 10,000.

NCD are listed securities in secondary market. Hence investors can sell their NCD before maturity, depending on demand and supply for a NCD in secondary market

Investors cannot withdraw NCD before maturity, but since NCDs are listed securities, investor can sell them in secondary market.

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