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NCDs are Non Convertible Debentures, considered one of the best debt options for the purpose of investments. This is the route highly treaded by the real estate companies to raise money for their capital requirements.
There are many reasons why people should invest in NCDs:
1. NCDs yield better returns: NCDs offer better returns than Bank FDs and fairly attractive due to advanced returns and lower risk when compared with other investment options. The interest rate and rate of return may vary between 11% to 18% depending on the market conditions and credit profile of the companies offering NCDs.
2. NCDs are not subjected to TDS: Returns from several venture instruments such as bank fixed deposits and company fixed deposits are subject to tax deduction at source (TDS). But in case of an NCD, as per section 193 of the Income Tax Act, no such taxes on interest earned are applicable when securities are issued by a company in a dematerialized (Demat) form and listed on a stock exchange. However, taxes are applicable to NCDs if they are in physical form. Also, a Non Resident Indian (NRI) who invests in NCDs is subject to TDS according to section 195 of the IT act.
3. NCDs are safer than other instruments: Not only do NCDs receive good credit rating, but they are also completely protected by the possessions of the company in form of land, earnings, assets etc.. Nevertheless, NCDs are also not completely insulated from market risks, but this risk is much lower in comparison.
4. NCDs can be easily liquidated: In case of NCDs you have an option to either sell on the National Stock Exchange or exercise a put option with regards to a premature exit. Exercising a put option enables the investor to exit the bond in return of the face value on the stipulated date. They have better liquidity due to their NSE listing.
There are a few disadvantages of premature exits such as interest rate risk on exits from the secondary markets. NCDs from the Real estate companies offer better rates of return though have their fair share of risk attached to such investments.
Factors to consider while selecting an NCD
Credit profile of the company: It is very important to check the credit profile of the company offering NCDs. You would not want the default on payment of your hard earned money and thus do your own due diligence on the financial health of the company before selecting on the particular NCD
Credit rating of the instrument: Next is to check the credit rating of the NCD. There are independent rating companies like CRISIL that rate the individual investment instruments and its worthwhile to check the ratings of the instrument that you wish to invest into.
Usage of the fund: Please ensure to check, where your funds are likely to be invested. Please avoid investments into the funds where the utilization of funds will be for non-core business of the company or any major deviation from the core business of the company.
Liquidity: The NCDs listed on stock exchange are easily liquitable and can be traded into the secondary markets. This provides for an opportunity to exit your investment whenever you may choose to do so. Though there are certain implications on your returns and tax applicable on your investment.
Factor in the post-tax returns: Please read the tax applicable on the NCDs selected. The higher tax may reduce the return in hand (post tax return) and there are better options available that might make your NCD investment less attractive.
Trust this article helps you in making wiser investment decision. Please write back to me with your feedback/suggestions.
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