Invest In NCD Which Offers Fixed Return
What Is NCD?
NCD, also known as Non-convertible debentures, is a fixed income product that offers far better returns when compared with Fixed Deposits or convertible debentures.
NCD is a debt instrument and popularly used by the NBFCs and other companies to raise long-term capital through the public issue of shares.
Investing in NCDs helps you earn better returns, offers the liquidity, is a low-risk instrument and offers tax benefits when compared to convertible debentures.
Things to consider before
investing in NCDs
The factors included in understanding the NCD meaning
stretch to learning about the ideal process
of investing in NCDs. Here are some things to consider before investing in
Non-Convertible Debentures (NCDs) in India
Every NCD is rated by various credit rating agencies to depict the issuer’s capability to fulfil the payment promises. If a company issuing the NCD has good financials and a positive cash flow, the issued NCD will have a higher rating. It’s best to invest in NCDs that have a credit rating equal to or higher than AA.
Unsecured NCDs provide higher interest rates as they are not backed by the company’s assets but are riskier than secured NCDs based on protecting investors’ investments. The decision to choose between secured and unsecured NCDs are based on your set financial goals and the risk profile.
Every NCD comes with a different tenure, which determines the redemption period for the investors and when they will be repaid their principal amount. The tenure can range from 2-15 years, and the choice of NCD tenure should be based on personal financial goals and manageable risk levels.
Non-Convertible Debentures in India have flexible interest payout options. However, the investor is liable to choose when the interest should be credited into their bank accounts. Before investing, choose an ideal payout time from options such as monthly, quarterly, half-yearly or annually.
Capital Adequacy Ratio (CAR) analyses the NCD issuer company’s finances and cash flow to present to survive potential losses based on the available funds. Before investing in an NCD, you should look at the Capital Adequacy Ratio to identify the possibility of default by the company.
Types Of NCDs
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Secured NCDs
They are one of the safest NCD options backed by the issuing company’s assets. Investors can seek payment through the liquidation process in case the company fails to pay the interest and repay the principal amount. The backing provides investment protection to investors and ensures their principal amount is safe. -
Unsecured NCDs
Unsecured NCDs are riskier than secured NCDs as they are not backed by the issuing company’s assets. In case the company defaults on its obligations to pay interest and repay principal, the investors can not seek payments through the liquidation process. The investors can only wait until the company has enough cash flow to fulfil payment promises.
Start Investing In 3 Simple Steps
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01
Complete KYC
Upload Your Documents Online -
02
Choose Bonds
Select Bonds That Matches Your Investment Goals -
03
Make Investment
Pay Online and Receive Bond Units In Your Demat Account
Tips for Investing in NCDs
To ensure that your NCD investment is successful, here are some tips for investing in NCDs:
Diversification: Non-Convertible Debentures in India are issued by numerous companies that belong to different sectors. Allocate the preferred investment capital across numerous NCDs of different companies to ensure you limit your losses if any.
NPA Provision: Non-Performing Assets (NPAs) indicate the debt obligation of a company where the company has not paid agreed-upon interest and principal repayments. Invest in a company’s NCD after ensuring that it has set aside 50% of its assets for NPAs. Any drop in this percentage would mean a decline in the financial condition of the company.
Selling Time: An NCD is the most in-demand when the interest is due to be paid by the issuer. NCD holders who are looking to sell it in the secondary market to make profits should hold until the interest is due to find the highest liquidity. It is at this time that you can make the highest profits.
Debt Level: One of the most important tips for investing in NCDs is to run a detailed background check on the NCD issuing company, especially its asset quality. If the company has unsecured loans amounting to more than half of its overall assets, you should skip investing in the NCD.