What is the full form of NCD

NCD: Non-Convertible Debentures

Non-Convertible Debentures (NCDs) are debt instruments issued by companies to raise funds from the public. Unlike convertible debentures, which can be converted into equity shares of the issuing company, NCDs cannot be converted into equity shares. NCDs have a fixed interest rate and a specific maturity period, after which the principal amount is repaid to the investors. NCDs can be listed on stock exchanges, providing liquidity to investors. These instruments are less risky than equity investments because they offer fixed returns and a known repayment schedule.

NCDs are often used as an alternative to bank loans, particularly for companies that may have difficulty accessing credit from traditional lending sources. Investors can purchase NCDs through public issues, private placements, or stock exchanges. The interest rate on NCDs is typically higher than that offered on bank deposits, making them an attractive investment option for investors seeking regular income. However, investors should carefully consider the credit rating of the issuing Company and other risk factors before investing in NCDs.

Types of NCD

The two types of non-convertible debentures are as follows:

1. Secured NCD

Secured NCDs are considered the safest of the two types because the Company's assets secure their issuance. If the firm cannot make payments on time, the investors may be able to recoup their money by selling the Company's assets. However, NCDs are given at a modest rate of interest.

2. Unsecured NCD

The Company's assets do not support unsecured NCDs, so they are significantly riskier than unsecured ones. As a result, when a firm fails to make a payment, the investors are left with little alternative but to wait until they do so because the Company has no assets with which to recoup its debts. However, unsecured NCDs are given at a higher interest rate than secured NCDs.

Features of NCD

Non-Convertible Debentures (NCDs) have several features that make them an attractive investment option for investors seeking fixed returns. Here are some of the common features of NCDs:

1. Fixed Interest Rate: NCDs offer a fixed interest rate, which remains the same throughout the tenure of the instrument. This makes NCDs a predictable and stable investment option for investors.

2. Tenure: NCDs have a specific maturity period, after which the principal amount is repaid to the investors. The tenure of NCDs can range from one year to ten years, depending on the issuing Company.

3. Credit Rating: NCDs are rated by credit rating agencies based on the issuing Company's creditworthiness. Investors can assess the risk associated with NCD by looking at the credit rating of the issuing Company.

4. Tradable: NCD can be listed on stock exchanges, providing liquidity to investors. Investors can buy and sell NCDs on the stock exchange before maturity.

5. Taxation: According to India's income tax laws, interest income earned on NCD is taxable. However, the capital gains are tax-free if the NCD is held till maturity.

6. Secured and Unsecured NCD: NCDs can be secured or unsecured. Assets of the issuing Company back Secured NCDs, while any specific company assets do not back unsecured NCDs.

7. Callable NCD: The issuing Company can redeem them before maturity. Callable NCDs typically offer a higher interest rate than non-callable NCDs but are also more risky.

Things to be considered before investing in NCD

• Ratings: To indicate credit ratings, rating firms employ basic alphanumeric symbols. For instance, rating organizations use long-term, short-term, and fixed deposit scales to categorize financial commitments and give credit ratings to each. Regarding safety, AAA has the highest credit rating, and a higher rating means the issuer will pay its debts on time and pose less of a credit risk. The Company's repayment history: Since your money is being used to purchase the bond, you must conduct research and background checks on the corporation. Find out whether the business has ever been in the habit of not paying its bills. If so, investing in these products would be foolish. However, it is preferable to invest in the NCDs of a firm if it has a solid track record of repaying its debtors.
• Secured and Non-Secured NCD: You must understand your position if the firm in whose NCDs you invested is wound up (closes down) and pays off its obligations. The ranking of the bonds, depending on the security, determines the sequence in which the Company pays off its debts. Bonds can either be unsecured or backed by assets. If the bonds are secured, the corporation would sell the assets they were backed by and compensate the investor in the case of the Company's dissolution. Listing and Liquidity: Debentures (convertible and non-convertible) can be listed on a stock exchange, offering chances to acquire more or sell them and leave before the maturity of the debenture. However, investors must exercise caution because changes influence the price movement of the instruments in interest rates and the appropriate coupon interest rate due on them. The investor benefits more from increased liquidity.
• Varying Tenures: Usually, redemption times last between two and fifteen years. Based on one's own financial objectives and risk tolerance, one should determine tenure.
• Interest Payout Options: One might consider the many interest payout alternatives provided by NCDs, such as monthly, quarterly, half-yearly, or annual interest payments, depending on the needs of the investors.

Benefits of investing in NCD

NCDs are a popular investment choice for investors looking to diversify their portfolios and earn regular income. Here are some of the benefits of investing in NCDs:

1. High Returns: NCDs offer higher returns compared to traditional fixed deposits. The interest rates on NCDs vary depending on the issuer, the credit rating, and the tenure of the investment. Generally, NCDs offer higher returns than bank fixed deposits, making them an attractive investment option.
2. Diversification: Investing in NCD helps diversify your portfolio, which can reduce the overall risk of your investment portfolio. NCD can be invested in various sectors such as infrastructure, manufacturing, real estate, and more, providing diversification opportunities.
3. Regular Income: NCD provides investors with regular interest payments, which can be monthly, quarterly, half-yearly, or annually, depending on the issuer's terms. This makes NCD an ideal investment for those who require a regular income stream.
4. Lower Risk: NCDs are relatively less risky than equity investments, as they are debt instruments. Also, NCDs are rated by credit rating agencies such as CRISIL, ICRA, and CARE, which help investors assess the credit risk associated with the issuer.
5. Liquidity: NCDs are listed on stock exchanges, which makes them tradable. Investors can sell their NCDs in the secondary market if they require funds urgently.
6. Tax Benefits: The interest income earned from NCDs is taxable per the investor's income tax slab. However, investors can avail of tax benefits by investing in NCDs issued by infrastructure companies or those listed on stock exchanges.

Investing in NCDs can provide higher returns, regular income, diversification, lower risk, liquidity, and tax benefits. However, investors should assess the issuer's creditworthiness, interest rate, and tenure before investing in NCDs. It is recommended to consult a financial advisor before making any investment decisions.

Tips for investing in non-convertible debentures

Investing in non-convertible debentures (NCDs) requires careful consideration and analysis to minimize risks and maximize returns. Here are some tips for investing in NCDs:

1. Analyze the Credit Rating: The credit rating of an NCD issuer is a crucial factor in determining the creditworthiness and safety of the investment. The credit rating agencies like CRISIL, ICRA, and CARE rate the NCDs on various factors such as the issuer's financial strength, market reputation, and industry outlook. Investing in NCDs with high credit ratings is advisable, as they are less likely to default on the interest payments and the principal amount.
2. Assess the Interest Rate: The interest rate offered on NCDs varies depending on the issuer, tenure, and market conditions. Investors should compare the interest rates different issuers offer to ensure they get the best returns on their investments.
3. Evaluate the Tenure: The tenure of the NCDs should align with the investor's investment goals. Short-term NCDs offer lower returns but are less risky, while long-term NCDs offer higher returns but carry more risk. Investors should choose the tenure of the NCDs based on their risk appetite, financial goals, and liquidity requirements.
4. Check the Liquidity: NCDs are listed on stock exchanges, which makes them tradable. However, the liquidity of the NCDs depends on the demand and supply in the secondary market. Investors should ensure they can sell their NCDs at a fair market price when required.
5. Understand the Tax Implications: The interest income earned from NCDs is taxable as per the investor's income tax slab. The capital gains tax will also apply if the NCDs are sold before maturity. Investors should know the tax implications of investing in NCDs and plan their investments accordingly.
6. Seek Professional Advice: Investing in NCDs requires careful analysis and knowledge of the financial markets. Investors should seek professional advice from financial advisors before investing in NCDs.

Investing in NCDs can be a good investment option for investors looking to diversify their portfolios and earn regular income. However, investors should analyze the credit rating, interest rate, tenure, liquidity, and tax implications and seek professional advice before making an investment decision.