Non-convertible debentures (NCDs) are long-term financial
instruments, issued by corporates to raise funds through public issue or
private placement. In other words, NCDs are debt instruments issued by
companies as part of their fund raising. They acknowledge a debt obligation
towards the issuer and come with a fixed tenure. As the name suggests, they
cannot be converted into equity of the issuing company. Interest on NCDs can be
earned monthly, quarterly, annually or cumulatively. For NCD, it is mandatory
for the company to get it rated, since it is a listed instrument. Various
ratings agencies such as ICRA, CARE and Crisis rate NCDs. The higher the
rating, the lower the risk.
There are two types of NCDs -
- Secured
- Unsecured
Secured NCDs come with slightly lower risk as it is secured
with some assets of the company and for unsecured NCD there is no asset
attached. That means if the issuing company defaults than secured NCD holder
would get paid by assets sell. And in
case of bankruptcy, secured debt holders will be paid first by selling off the
company’s assets. Whereas unsecured NCDs are not unsecured loans, in case of
default unsecured bond holders used to pay off with the leftover money after
making all payment to secured bond holders.
- NCDs have higher returns of around 8.5%. than Bank FDs offer returns between 5% - 7%.
- No tax Deducted at Source (TDS) on listed debentures. With Bank FDs, TDS applies for interest.
- Unlike FDs, NCDs don’t have liquidity concerned as they are listed on the stock exchanges, so they can be traded on demand.
- Ratings by agencies like CARE, FITCH, CRISIL, ICRA enables you to assess the quality before investment
- Option of holding NCD in 'Demat Form' makes your investments easy to handle & monitor
To summarise, NCDs is a better investment solution, when compared to FDs. Higher returns,
higher liquidity and no tax deductions at source make NCDs a very good option
for your idle money.
Hope this will help..
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