NCDs (Non-Convertible Debentures)

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Non-Convertible Debentures are debt instruments sought by investors in bonds. These bonds cannot be converted into equity at a later stage and hence the name "non-convertible". These instruments are gaining popularity in the recent 3 years due to higher returns they offer compared to long term bank FDs. Typically infra companies and NBFCs (Non-Banking Financial Companies) issues NCDs. If the cost of raising debt for such companies gets higher or if they have exhausted their existing credit lines, then such companies issue NCDs to raise funds from public. Most of the NCDs issued are secured, but there are also unsecured NCDs - you need to check for this info in each issue. Unsecured NCDs have higher risk than secured NCDs and carry a higher risk premium.

Features
  • Debt is "secured" against assets of the issuer (for Secured NCDs)
  • Liquid instrument as it is traded in secondary markets
  • Suited for medium tenure of 3 to 6 years
  • Need demat account to purchase NCDs as these are issued in demat form
  • Issues are rated by rating agencies
  • NCD being a capital asset, capital gains tax applies
  • TDS not applicable if puchased in demat form
  • Treated as long term asset if held for >12 months and taxed at 10.3% without indexation
  • Subject to interest rate risk as with other debts
  • NRIs allowed to invest if permitted for the issue

Is it a good investment?
At a product level although NCDs are better products (in terms of higher returns) when compared to FDs, they do come with interest rate risk and default risk. It would be prudent to get your financial planner to evaluate the fundamentals of the issuer and thoroughly examine each issue prior to investing in an NCD. You may also have to consider whether the NCD is part of your overall investment strategy and bringing it into your asset mix improves or affects the overall performance of your portfolio.

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