What Are Non convertible Debentures (NCDs)?

The non convertible debentures are fixed-income financial instruments that are issued by businesses to raise capital from investors. In case of investing in an NCD, an investor is lending the funds to the company at a fixed interest over a set period of time and in exchange for constant interest payments. The full form of NCD is Non Convertible Debentures, which means it is not convertible to company shares like convertible debentures in case they reach maturity. NCDs are typically fixed rate product with specified maturity date, which helps the investor to find a stable rate of interest. This article explains what is non convertible debentures meaning, their types, how to invest in them, and more.  

How to Invest in NCDs 

Here’s how investors can invest in NCDs: 

1. Check Upcoming Public Issues 
   Companies announce public issues when they want to raise funds through NCDs. Investors can apply during this subscription period through authorised channels. 
2. Use a Demat and Trading Account 
   You need a Demat account and access to an online trading app to apply for listed NCDs. This route allows electronic holding and smooth transactions. 
3. Review Credit Rating 
   Credit rating agencies such as CRISIL or ICRA rate NCDs. A higher rating generally indicates lower default risk. 
4. Select Interest and Tenure Option 
   NCDs offer different payout choices such as monthly, quarterly, yearly, or cumulative. Choose based on your income preference. 
5. Apply Through Exchange or Broker 
   After listing, investors can purchase NCDs from the secondary market through a registered broker platform. 

Types of Non-convertible Debentures 

After understanding the NCD meaning and how to invest in it, here are a few types of it. 

1. Secured NCDs 

These NCDs are backed by the company’s assets as collateral. In case of default, investors have a claim on the secured assets, which generally lowers the risk compared to unsecured NCDs. 

2. Unsecured NCDs 

Unsecured NCDs are not backed by any specific assets. They usually offer higher interest rates to compensate for the higher level of risk involved. 

3. Listed NCDs 

These NCDs are listed on stock exchanges, allowing investors to buy or sell them in the secondary market before maturity. 

4. Unlisted NCDs 

Unlisted NCDs are not traded on stock exchanges and are typically held until maturity. Liquidity may be limited in such cases. 

5. Cumulative NCDs 

In cumulative NCDs, interest is not paid periodically. Instead, it is compounded and paid along with the principal at maturity. 

6. Non-Cumulative NCDs 

These NCDs provide regular interest payouts (monthly, quarterly, half-yearly, or annually) during the tenure of the investment. 

Features of Non-convertible debentures 

To completely understand what is NCD, it's important to understand its features as well 

• They offer a fixed rate of interest for a specified period. 
• Have a predetermined maturity date. 
• Cannot be converted into equity shares. 
• May be secured or unsecured in nature. 
• Generally, provide higher returns than traditional fixed deposits. 
• Can be traded on stock exchanges if listed. 
• Credit-rated by recognised rating agencies. 

Factors to Consider Before Investing in Non-convertible debentures 

Consider the following before investing in non-convertible debentures 

1. Check the credit rating of the issuing company carefully. 
2. Review whether the NCD is secured or unsecured. 
3. Understand the tenure and lock-in period before investing. 
4. Compare interest payout options with your income needs. 
5. Assess liquidity if you may need funds before maturity. 
6. Study the financial position of the issuing company. 
7. Review taxation rules applicable to interest and capital gains. 

Who Should Invest in NCDs? 

Non-Convertible Debentures (NCDs) may suit certain types of investors. Here is who can consider them: 

1. Investors Looking for Regular Income 

If you want steady and predictable interest payments, NCDs can be suitable. Many NCDs offer fixed returns, which makes income planning easier. 

2. People Seeking Higher Returns Than Fixed Deposits 

Some NCDs offer higher interest rates than bank fixed deposits. Investors who are comfortable with slightly higher risk may consider them. 

3. Retirees Needing Stable Cash Flow 

Non-cumulative NCDs provide regular payouts such as monthly or quarterly interest. This can help retirees manage daily expenses. 

4. Investors with Moderate Risk Appetite 

NCDs are issued by companies, so they carry credit risk. Investors who understand this and can assess the issuer’s credit rating may find it suitable. 

5. Those Wanting Portfolio Diversification 

NCDs can help balance a portfolio that has higher exposure to equities. They add a fixed-income component and may reduce overall risk. 

6. Investors with a Fixed Investment Period 

NCDs have a defined maturity date. They are suitable for investors who can stay invested until maturity. 

Before investing, always check the issuer’s credit rating and financial strength. Careful selection is important. 

Conclusion 

Non Convertible Debentures are fixed-income instruments through which companies borrow funds for a defined period. They offer preset interest payouts and may be traded on exchanges when listed. Before investing, review credit rating, tenure, and liquidity aspects carefully. Investors who track such opportunities through a share trading app can monitor listed NCD options and make informed portfolio decisions.