NCD (Non-Convertible Debentures) – Who can invest?
Are you seeking information regarding much talked about non-convertible debentures? If you are? Then surely you are landed at the right place.
With the help of this post, I will provide you complete detail of NCD (Non-convertible debentures)
What are Non Convertible Debentures (NCDs)?
In simple words, non-convertible debentures are fixed income products that offer a lucrative high rate of returns which are difficult to overlook?
There are few NCD trending in the market which is giving an attractive rate of returns than typical Bank FDs and debt funds.
Who can invest in Non-Convertible debentures, what are the risks involved in NCD?
NCD such as DHFL, JM financial is giving 9% return to you. However, the bank is giving FD at around 7% interest rate.
The current set rate of bank fixed deposits is 7%.
Read us till the end to know more all about Non-convertible debentures!
So, without much ado, let get started!
In this article, we will discuss the following key hand-picked topics
- What are debentures?
- Types of debentures
- Taxation of NCD
- Who can invest
- Advantages of NCD
- Drawbacks of NCD
- Upcoming NCD 2019
- Post Office Saving Schemes
So, let’s begin
What are Debentures?
A debenture is one of the most typical forms of long loans that a company can avail.
Yes, debentures are nothing but you are issuing or lending money to the company.
In return, the company promises you with the interest rate and return of principal at a specified time period.
Types of Debentures
Convertible and Non-Convertible Debentures
Convertible debentures are those which are turned into shares/stocks of the company after a specified time.
Convertible debenture means after the specified time, the debentures are converted into the shares(Stocks) of the company.
You will enjoy the fixed coupon interest on such debentures. After that, your earning will be based on the price appreciation of the stock or the dividend income you receive
These debentures are converted into (stocks) of the company. You will enjoy a fixed specified coupon interest rate on such debentures.
After that, your earning will be based on the price appreciation of the stock or the dividend income you receive.
Non-convertible debentures, on the other hands, cannot be converted into the shares
Investors won fund their money in such debentures will enjoy a fixed interest rate up to maturity and after that return of the principal.
Secured and Unsecured Debentures
Under secure debentures, companies who are borrowing money from you along with a promise to repay the interest and principal timely
Secured debentures are much preferred than unsecured debentures, the reason is in case of something happened wrong, or bankruptcy the company will sell the asset to repay back you with the money
Whereas, the risk associated with unsecured debentures is high also because of the great risk they provide a higher interest rate.
Call and put option in Debentures
Incall option a company can ask the investor to surrender the debenture after a certain period of time.
In such cases, the company will pay back the principal to you.
The company exercise the call option if the interest rate goes down, and the company can get the funds from the market at lower rates
Under the put up option, the investor can surrender the debentures as per his choice, and get his principal back
You can apply this option if the interest rate is higher and you are getting lesser for the same and get back your money, invest it somewhere else
Remember the call and put options are made available to the investors after holding the debentures for some time period.
Latest NCD Table
Taxation of NCD
Major Questions:
# Interest income
The taxability of interest will depend on the method of accounting you follow to recognize your income
If you are following the cash method of accounting interest will be taxable as when the tax is received
However, in the mercantile method, interest income on NCD will be taxable as when the interest is accrued and due
Hence, interest received is considered as earning from the other source
# Short Term Capital Gain
If you have held the debentures for the time period of less than a year and then sold it in the secondary market. Any such profit or gains you make from the selling will be taxed as per the tax slab
#Long Term Capital Gains
If you hold the listed NCD, (Cumulative or annual interest rate payment), for a period of one year or more and on the selling of which you have made profits, then such gains will be treated as LTCG that is long-term capital gain or profit chargeable to tax at 10% without indexation benefit.
Who can invest in NCD?
It is to be noted that investment decisions are sensitive one should take it with utmost caution and alertly.
Do not get carried away by the lure of high returns from such debentures.
“Risk comes from not knowing what you’re doing.” – Warren Buffett
Always invest money after thorough knowledge and understanding. You can also seek help from the expert
Advantages of investing in NCD
If you are seeking who should invest and what are benefits you can gain, then please read the following
- These are considered as a great option if you are looking for a constant stream of income. Few NCDs offer you to return interest and the principal amount at the maturity itself. Hence in such a case, they act like typical FDs
- Usually, provide a higher rate of returns as compared to Bank FDs.
- These NCD are listed in stock exchanges. In case of the liquidity, you can sell it in the secondary market
- Interest will be credited to your bank account. Hence, ease of managing money
- There will be no tax deduction at source for these NCDs if you held in the Demat format
- It will give diversification to your debt portfolio.
- How to Earn Money From Share Market?
Disadvantages of NCD
- Never trust the credit rating and jump into investing
- They are rarely traded even after listed in the secondary market like BSE or NSE. You may face the liquidity issue
- Always check for the post-tax returns
- Higher interest means higher the amount of risk
Difference between Corporate FDs and NCDs
It would be highly beneficial to know the difference between corporate fixed deposits and NCDs as given in the following table:
| Corporate Fixed Deposits | NCDs |
| Unsecured against the assets of the bank or corporate | NCDs is either secured or not secured against the company assets |
| Exit route (especially early withdrawal) is difficult as it is often at the discretion of the company | Trade/transactions on stock exchanges (NSE & BSE) are allowed |
| Interest earned (if more than Rs. 10,000) on corporate deposits has TDS | No TDS for registered NCDs |
| Deposit Insurance and Credit Guarantee Corporation insures bank FDs (up to Rs. 1 lakh). | NCDs are not insured but are secured against the company assets |
| While you cannot sell FD in the market, FDs enjoy more liquidity than NCDs | NCDs can be traded, but cannot be withdrawn prematurely |
| No interest risk | Interest can vary as per the market and hence carries higher risks |
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What are the Tips for Investing in NCD?
- Check financial statement of the company such as CAR (capital adequacy ratio. Look for the financial health of the company.
- Diversification-investing across various firms and periods can reduce the risk considerably
- Go for secured debentures as they are low risk associated with them.
- Read the terms and condition – if they do not provide you with a clarity I would invest to not invest.
- Never go by the interest rate alone, there are certainly other factors that also matter
- The perfect time to sell the NCD When its interest is due because that is premium trading time for an NCD. You will make more money out of it.
Checklists
- Investors must check certain factors before selecting any NCD for investment
- Look at the company’s financial health
- Always check the rating of the company
- A recent report by CRISIL states that no single instrument with AAA rating has ever defaulted
- Look at past tax returns as higher taxability reduces the return from NCD.
Final Words
Hope you find the post regarding “Non-convertible debentures” of great help.
The purpose of this post is to provide personal finance awareness and help you make an informed decision.
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Thanks for readings and have a great day ahead!
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