Introduction:
NCD investments are a popular asset type in India, primarily because of the guaranteed and fixed return on investment. Is there any investment option that may give a better-fixed return on your money, say 9-10%?
There will always be investors looking for a suitable NCD investment option that provides greater returns while managing risk and liquidity to a considerable degree.
NCD investments (NCDs) have emerged as a favored asset among investors, giving a solid risk-return profile and ease of liquidity.
What exactly are Non-Convertible Debentures?
Non-convertible debentures (NCDs) are debt instruments that cannot be converted into either equity or stock by the issuing firm. Typically, large corporations issue them to obtain funds without providing a conversion option into stock. NCDs are not typically secured by collateral. Investors may only depend on the creditworthiness of the issuing firm and the ratings provided by credit agencies. These ratings assist investors in understanding the issuer’s creditworthiness and prospects.
NCDs have a set interest rate. They mature and pay interest monthly, quarterly, half-yearly, or annually, depending on the terms of the issue. Investors get principal and interest at maturity. NCDs outperform convertible debentures in liquidity, risk, and tax benefits.
Non-Convertible Debenture Types
The two categories of non-convertible debentures are as follows:
Secured NCD
Secured NCDs are the safest option since the company’s assets or collateral backs them. If the firm pays the agreed amount on time, investors may collect losses by liquidating the company’s assets. The interest rates on these NCDs, however, are modest.
NCD without security
Unsecured NCDs are riskier than secured NCDs since the company’s assets or collateral does not back them. If the corporation fails to repay the investors, they will have no alternative but to wait until they are paid. The corporation does not have any assets to recoup its debts. In other words, the corporation pays these investors only after the holders of secured NCDs have been paid. Furthermore, the interest rate on these NCDs is more excellent than on Secured NCDs.
Non-Convertible Debentures Characteristics
Subscription
Investors may subscribe to NCDs within a defined time limit during public issuance. They are also listed on a stock market, where investors may subscribe through licensed brokers.
Liquidity
NCDs have more liquidity since they must be listed on a stock market. As a result, investors may purchase or sell NCDs on the secondary market at any time. It is an essential function since it may assist you in arranging funds in an emergency.
Rate of Interest
An NCD’s interest rate is often more significant than a fixed deposit. Unsecured debentures also have higher interest rates. They can make interest payments monthly, quarterly, semi-annually, or annually. In addition, they provide a cumulative payment option.
NCDs have a flexible tenure, with a minimum of 90 days and a maximum of 10 years. Investors may choose between short- and long-term NCDs depending on their NCD investment objectives.
Credit Score
The firm that issues NCDs must seek ratings from credit rating organizations like CRISIL, CARE, ICRA, and others. It is crucial in establishing the creditworthiness and ability of the firm to fulfill its commitments to creditors. A firm with a high credit rating is more likely to meet its obligations, while a corporation with a poor credit rating is more likely to default on its obligations. As a result, if the issuing firm fails to make payments, the agency will reduce its rating.
Taxation
NCD taxes are the same as debt taxation. If the investor sells the NCD within three years, STCG at the income tax slab rate will apply. If the investor sells the NCD after three years, LTCG at 20% with indexation will be applied.
What is the significance of the term “non-convertible”?
After a specific period, certain debentures may convert into shares. It is done at the owner’s discretion. It is, however, not practicable in the case of NCDs. That is why they are referred to as non-convertibles.
While NCDs cannot be converted into shares, they provide additional advantages.
NCDs have a rate of return of 11-12%. It is high in comparison to the majority of investing possibilities. For example, fixed deposits (FDs) are another common place for consumers to park their money in exchange for regular returns. However, the rewards are far less.
NCD vs BOND: What’s the difference?
A significant distinction between NCDs and bonds is that investing in NCDs does not require depositing an investor’s asset, but investing in bonds does.
NCDs are bonds that are connected to a loan. These are debt products used to accumulate financial capital over time. Bonds are another financial instrument in which an investor may buy bonds from different public or private businesses and then sell them to earn profit.
NRI subscriptions to Indian bonds have expanded significantly over time. As a result, interest rates have risen as well. What began with 3.4% yields is now standing tall with 20% interest rates on long-term capital gains.
Bond Characteristics:
- NRIs may make bond investments via the ‘NRI window.’
- Capital bonds, public sector units, corporate bonds, NCDs, government tax-free NRI bonds, Treasury bills, municipal bonds, and other forms of bonds are accessible to NRIs.
- NRIs may use a Demat account to purchase and sell bonds.
- According to the ITA,1 961, interest derived from bond investments was taxed. There are, however, tax-free government bonds created for NRIs that provide tax exemptions.
- Long-term capital gains and short-term capital gains are both taxed.
Non-Convertible Debentures: Key Characteristics (NCDs)
- NCD investments last anywhere from three months to thirty years.
- Their interest rates are greater than those of bank fixed deposits.
- Through the NCD IPO, NRIs may invest in NCDs.
- NCDs do not require the issuer to provide security or assets and instead rely only on the issuer’s credit and credit ratings.
- NCDs are accessible on the stock market, and trading NCDs granted to NRIs are listed in the Demat account.
- The interest rate on NCDs is determined by the kind of stock and is set at a minimum of 3% for NRIs by RBI rules.
- NRIs are permitted to exit from NCDs after three years.
- NCDs must pay TDS on their interest and returns.
- NRIs must provide the RBI with a receipt for their NCD payments within 30 days of investing.
How to buy NCD in secondary market?
NCDs are issued by listed corporations and traded openly on the BSE and NSE. The corporation initially issued NCDs and then traded them in the secondary market. So, you may either subscribe when a firm releases its NCD or purchase afterward when it trades in the secondary market.
When discussing how to acquire NCDs, it is essential to note that the company’s reliability determines the value of an NCD offer. As a result, while selecting the finest NCD offers, consider the company’s credit rating, the coupon rate, and the issuers’ reputation. Credit rating agencies rate NCDs.
It is best to purchase NCDs with higher ratings, such as AAA+, AA+, etc. The higher the rating, the better the deal. Check the company’s financial statements as well. Investing in reliable organizations that are successful and have a strong track record of loan payback ensures a decent return as well as peace of mind.
Investing in NCDs has tax ramifications since the interest income is taxed according to income slabs. A short-term capital gain tax is also paid if you trade the NCD on the secondary market before one year. After the first year, a long-term capital gain tax of 20% is levied after taxes.
3 best NCD to invest in 2022
1. Shriram City Union Finance Corporation NCD
Shriram City Union Finance is a well-known NBFC in India for its automobile and housing loans. The organization is also active in other markets, such as SME loans, two-wheeler loans, etc. It has a solid track record with NCDs and has always paid its interest and principal on schedule. Shriram City Union Finance’s NCDs are rated AAA by ICRA and CARE.
2. Mahindra Financial Services NCD
It is one of India’s largest NBFCs, well-known for its rural financing and tractor loans. The corporation has a solid track record of making regular interest and principal payments regarding NCDs. Mahindra Finance’s NCDs are rated AAA by CARE and ICRA. The NCD issuance size was Rs. 500 crores, with an option to retain up to Rs. 1,000 crores in oversubscription.
3. L&T Finance Holdings, Inc.
L&T Finance Holdings is a prominent NBFC in India specializing in home loans, equipment finance, and SME financing. The corporation has a solid track record of making regular interest and principal payments regarding NCDs. L&T Finance Holdings’ NCDs are rated AAA by ICRA and CARE. The NCD issuance size was Rs. 500 crores, with an option to retain up to Rs. 1,000 crores in oversubscription.
How to invest in NCD bonds?
You may go to the issuer’s website and apply, thereby making an online payment, if such an option is accessible to investors. You may apply online if you already have a Demat account with a brokerage firm like ICICI Direct or HDFC Securities. Furthermore, NCD issuers have locations where approved intermediaries such as brokers and registration agents may take Application Forms in natural form. To apply for NCDs, send the ASBA Forms (including ASBA Forms under UPI for UPI Investors) to a Registered Broker.
Bottom Line
Investors demand investing alternatives that balance liquidity and risk while providing high returns. Debentures are long-term financial instruments issued by a firm with the guarantee to pay a set interest rate to the investor. Non-convertible debentures (NCDs) cannot convert into shares or equity. The interest rate on an NCD is determined by the firm issuing the NCD.
Individuals, banking corporations, primary dealers, other corporate organizations registered or incorporated in India, and unincorporated bodies may opt for NCD investment.
