Non-Convertible Debentures (NCDs) generally offer returns in the range of 9% to 12%. The investor must put in good research behind his choice of Issuer since these products have a certain extent of credit risk for the investor.
Let’s understand the product a little better:
What is a Debenture?
Debenture is a type of Debt instrument which offers a fixed rate of interest for a specified tenure. Companies or governments use debentures to borrow money. Debentures are simply loans taken by the companies and do not provide the ownership in the company.
Bonds and Debentures have lot of similarities, both offer fixed interest rate and they have fixed tenure. But, bonds can be more secured than debentures. For this reason bond holders receive a lower rate of interest when compared to Debentures coupon rates. Bonds(Ex – Tax Free Bonds)are mostly issued by Government firms / entities.
What are NCDs?
Debentures are of two types Convertible and Non-Convertible. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate.
An NCD can be Secured or Unsecured. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation unlike unsecured NCDs.
How to buy NCDs?
Public Issue:During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested. Also, you can make an investment online through your Demat Account.
Secondary Market:NCDs bonds are listed on NSE or BSE or at times on both after the Public Issue. You can invest in these bonds through your trading account like the way you invest in shares. (But do note that NCDs have liquidity risk. Even if NCD get listed, low volumes can deprive investors of any opportunity in exiting prematurely.)