Non-convertible debentures (NCDs) are a popular financial instrument in the Indian financial market, often sought after by investors seeking a steady stream of income with a relatively lower risk profile compared to equities. To comprehend the concept of non-convertible debentures, one needs to delve into both their meaning and how they operate within the landscape of debt securities.
Non-Convertible Debentures Meaning
Non convertible debentures meaning debt instruments issued by companies to raise long-term capital. Unlike convertible debentures, which can be converted into equity shares of the issuing company at a later date, NCDs cannot be converted into equity shares. This non-convertibility underscores their primary characteristic and distinguishes them from other hybrid debt instruments.
How Do Non-Convertible Debentures Work?
When a company issues NCDs, it essentially borrows money from investors for a fixed tenure and agrees to repay the principal amount along with periodic interest payments. The interest rates on NCDs are generally higher compared to fixed deposits, making them an attractive option for investors.
Interest Payments
One of the key features of NCDs is the fixed interest rate, which can be either payable annually, semi-annually, quarterly or monthly. This provides a predictable return, making it easier for investors to plan their cash flows. For instance, if an investor purchases an NCD with a face value of INR 1,000 carrying an annual interest rate of 8%, they will receive INR 80 per annum until the maturity date, whereupon the principal amount will also be repaid.
|
Description |
Maturity Amount |
|
Face Value |
1,000 |
|
Annual Interest |
8% |
|
Interest Payment |
80 |
|
Maturity Amount |
1,000 |
Credit Rating
NCDs are usually rated by credit rating agencies based on the issuer's financial health and repayment capability. A higher credit rating indicates a lower risk of default, making such NCDs more attractive to risk-averse investors. However, NCDs with lower credit ratings might offer higher interest rates to compensate for the increased risk.
Secured vs Unsecured NCDs
NCDs can be either secured or unsecured. Secured NCDs have a charge on the assets of the issuing company, providing a safety net for investors in case of default. Unsecured NCDs, on the other hand, do not have such backing and carry a higher risk.
Market Trading
Another interesting aspect of NCDs is that they can be listed on stock exchanges, providing liquidity to investors. They can be bought and sold on the secondary market before maturity. However, the trading price may fluctuate based on interest rate movements and credit rating changes.
Tax Implications
The interest earned on NCDs is subject to taxation as per the investor's income tax slab, which is an essential factor to consider while calculating post-tax returns. Moreover, any capital gains arising from the sale of NCDs on the secondary market will also be taxed according to the holding period.
Why Consider NCDs?
NCDs are a trending option for investors who are looking for a higher return as compared to fixed deposits, without taking on the volatility associated with equity markets. They can offer a predictable income stream along with the opportunity for capital appreciation if traded at a premium in the secondary market.
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Conclusion
Understanding the meaning and functioning of non-convertible debentures is crucial for making informed investment decisions. While they offer several benefits, including higher interest rates and predictable income, they also come with risks such as credit risk and interest rate risk. It is important for investors to thoroughly assess their financial goals, risk appetite, and the credit rating of the issuing company before investing in NCDs.
Disclaimer:
This article is for informational purposes only and does not constitute financial advice. Investors must gauge all the pros and cons of trading in the Indian stock market and consider their unique financial situation before making investment decisions.
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