Monday 1 March 2021

SHOULD YOU INVEST IN NCDs

 

NCDs are Fixed Income Instruments for Assured Returns Non Convertible Debentures (NCDs) or Bonds are debt investments in which you lend money to a corporate or government entity that borrows the funds, for a specified period of time at a fixed interest rate.


NCDs are suitable for

·         Stable consistent return with least risk

·         Consistent periodic return rather than lump sum return

·         Low risk appetite

·         Diversification of portfolio with debt instrument


NCDs Benefits

·         Return is relatively higher in NCDs than a lot of other investment avenues.

·         No income tax is deductible at source as per the provisions of Sec 193 of the IT Act.

·         NCDs are listed and traded on the exchange, hence providing liquidity to the investor.

·         Agencies like CARE, FITCH, CRISIL, ICRA rate NCD's that are good indicator of quality of debt paper.

·         As NCDs are only in Demat online form, it is easier to handle and track.

Difference between NCD and Bond

NCDs are issued by public companies, whereas bonds are issued by government entities, large companies, and financial institutions to raise capital for the business purpose. Bonds are generally secured, whereas NCDs can be secured and unsecured.

What are Convertible and Non Convertible Debentures

Convertible debentures are those type of debentures that can be converted into equity shares of the company. Non-convertible debentures are those debentures that cannot be converted into equity shares of the company.

Type of NCDs

Secured NCDs: Secured NCDs are considered safer of the two kinds as their issues are backed by the assets of the company. In the event of the company failing to pay on time, then the investors can recover their dues by liquidating the company’s assets. However, the interest offered on NCDs is low.

Unsecured NCDs: Unsecured NCDs are much riskier than the secured NCDs as the assets of the company do not back these. Hence, when the company defaults on its payment, the investors have no choice but to wait until they receive payments as there are no assets of the company to recover their dues. However, the interest rate offered on unsecured NCDs is higher than that of secured NCDs.

Is NCDs interest Taxable

In short term (Less than 1 year) NCDs are taxed at your slab rate, which means if you are in the highest tax bracket, the interest you earn will be taxed at 30%.

In long term capital gain tax is 10%. NCDs can work for those in the lower tax category or those with no taxable income.

 

Don’t let high interest rates sway you, look at the risks