NCD Full Form-Non Convertible Debenture

Non-Convertible Debentures (NCDs): A Complete Guide to Secure Fixed-Income Investments 

Introduction 

Investors looking for fixed-income securities often consider Non-Convertible Debentures (NCDs) as a viable option. NCDs are debt instruments issued by companies to raise capital, offering attractive interest rates with relatively lower risk than equities. Unlike convertible debentures, NCDs cannot be converted into equity shares and must be repaid to the investor at maturity. In this article, we will explore what NCDs are, their types, benefits, risks, and factors to consider before investing. 

What Are Non-Convertible Debentures (NCDs)? 

Non-Convertible Debentures (NCDs) are fixed-income financial instruments that companies issue to raise long-term capital. These debentures come with a fixed tenure and offer periodic interest payments to investors. Unlike convertible debentures, they do not provide an option to convert them into equity shares of the issuing company. 

Types of Non-Convertible Debentures 

NCDs can be classified into two main categories: 

1. Secured NCDs 

These debentures are backed by the issuing company’s assets. In case the company defaults, investors have a legal claim over specific assets of the company. This makes secured NCDs a safer investment option. 

2. Unsecured NCDs 

Unlike secured NCDs, unsecured NCDs are not backed by company assets. This makes them riskier; however, they often offer higher interest rates to compensate for the increased risk. 

Features of Non-Convertible Debentures 

Fixed Interest Rate: Investors receive a pre-determined interest rate over a fixed tenure. 

Tenure: Typically, NCDs have maturities ranging from 1 year to 10 years. 

Liquidity: Some NCDs are listed on stock exchanges, allowing investors to trade them before maturity. 

Credit Rating: Issued by rating agencies, helping investors assess the risk factor associated with a particular NCD. 

Taxation: Interest earned on NCDs is taxable as per the investor’s income tax slab. 

Benefits of Investing in NCDs 

1. Higher Returns 

Compared to traditional fixed deposits (FDs), NCDs generally offer higher interest rates, making them attractive for fixed-income investors. 

2. Regular Income 

Investors can opt for monthly, quarterly, or annual interest payouts, depending on the NCD structure. 

3. Lower Risk Compared to Stocks 

Since NCDs are debt instruments, they carry lower risk than equity investments while still offering steady returns. 

4. Liquidity 

Listed NCDs can be traded on stock exchanges, providing investors with the option to sell before maturity. 

Risks Associated with NCDs 

1. Credit Risk 

If the issuing company faces financial difficulties, it may default on interest payments or principal repayment. 

2. Interest Rate Risk 

If market interest rates rise, existing NCDs with lower interest rates may become less attractive, reducing their market value. 

3. Liquidity Risk 

Although some NCDs are listed, they may have low trading volumes, making it difficult for investors to exit before maturity. 

Factors to Consider Before Investing in NCDs 

1. Issuer’s Credit Rating 

Always check the credit rating assigned by agencies like CRISIL, ICRA, or CARE to assess the company’s financial stability. 

2. Interest Rate & Tenure 

Compare interest rates across different issuers and choose an NCD with a tenure that matches your financial goals. 

3. Tax Implications 

Interest earned on NCDs is taxable as per your income tax slab. Consider post-tax returns before investing. 

4. Liquidity Needs 

If you might need funds before the maturity period, opt for listed NCDs that can be sold on the stock exchange. 

How to Invest in NCDs? 

Primary Market: Investors can subscribe to NCDs when a company issues them via public offerings. 

Secondary Market: Listed NCDs can be purchased through stock exchanges. 

Demat Account: Most NCDs are issued in dematerialized (Demat) form, so investors need a Demat account. 

Non-Convertible Debentures (NCDs) are an excellent investment option for those seeking higher fixed returns with lower risk compared to equities. However, investors should evaluate credit ratings, interest rates, liquidity, and taxation before making a decision. With careful planning, NCDs can be a reliable addition to an investment portfolio, ensuring steady income and capital protection.