Explore how non-convertible debentures provide fixed income and higher yields for safer, long-term investments

Non-Convertible Debentures (NCDs) are fixed-income instruments issued by companies to raise long-term funds. They offer investors consistent interest payouts, with the principal repaid at maturity. Unlike convertible debentures, NCDs cannot be converted into company shares.

These instruments are lucrative for investors seeking predictable, stress-free returns, higher yields than traditional bank deposits, and opportunities for portfolio diversification.

What are the key features of NCDs?

NCDs come with several key features. Some of them are briefly discussed below:

1. Fixed returns: NCDs provide investors with stable interest payments. These payments can be made either monthly, quarterly, annually, or at maturity, according to the terms of NCDs and the investor's wishes.
2. No conversion to equity: NCDs, as their name suggests, continue to remain pure debt instruments only. This remains constant throughout their tenure, and they cannot be converted into any form of equity or stock.
3. Credit ratings: NCDs are rated by leading credit rating agencies, such as CARE and CRISIL. These ratings reflect the NCD-issuing institution's default risk and the probability of meeting interest payments. An AAA rating is generally considered the safest rating possible.
4. Liquidity: NCDs are generally listed on the BSE and the NSE, which allows aspiring investors to trade and invest in them before maturity. Liquidity, hence, is an extremely crucial feature of an NCD as it also provides investors with an exit route.
5. Flexible tenure: The tenures of NCDS can vary in duration. Some can be short-term, lasting just 1 or 2 years, and some can be long-term, lasting 10 years or more. That is why they are designed to cater to investors' different financial goals.

What are the types of NCDs?

• Secured NCDs: These are NCDs backed by company assets. That is why they provide investors with boosted and enhanced safety. Still, the overall yields are slightly lower.
• Unsecured NCDs: These NCDs are unsecured in nature, i.e., they lack any company backing. That is why they carry a higher risk. Still, they offer aspiring investors better returns to compensate for and mitigate the higher risk possibility.
• Payout options offered: NCDs are available in fixed, floating, cumulative (paid at maturity), and non-cumulative (with periodic payments) formats.

What are the benefits of investing in NCDs?

NCDs generally offer investors higher interest rates compared to bank fixed deposits. NCDs also provide investors with customisable tenure and payout frequency, and ensure liquidity through exchange trading. This makes NCDs suitable for both new and experienced retail investors, as well as institutional investors seeking steady income for their substantial portfolios.

How can you invest in NCDs?

You can invest in NCDs through the primary market during new issues through reputable brokers or online platforms. Investments can also be made in secondary markets using a Demat account and a trading account.

What should you keep in mind before you invest?

Before investing in any asset class such as NCDs, it is essential to conduct thorough research and exercise proper due diligence. Carefully check the credit rating, liquidity, tax implications and ensure that the tenure of the NCDs aligns with your long-term plans and financial objectives. Post that, only invest after a proper discussion with a certified financial advisor.

Disclaimer: NCDs involve credit and market risks, including possible delays or defaults. Always review offer documents and evaluate your risk appetite before investing.