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Check rating of issue before buying NCDs

 

AT TIMES, where inflation hovers above nine per cent and stock market returns are unstable, it is important for an investor to park his funds in avenues that would provide higher returns to combat the inflationary effect on investments. For those looking at fixed and safe rates of returns, fixed deposits in banks and non-convertible debenture (NCD) by companies are good options to consider.

Shriram Transport Finance has recently announced a NCD issue in which it promises returns of 11 per cent and above.

Since many more such retail NCD issue are waiting to hit the markets in the months to come, it is important to know how NCDs fare as investment avenues compared to fixed deposits.


Check the ratings of the issue: Companies come out with a bond issue if they need capital but cannot or do not want to borrow it.


Hence, they offer higher interest rates. An investor has to look for the rating of the issue. If an issue is rated AA or AAA and offers a 11 per cent interest it is better to go for it than another issue which is rated B and offers 13 per cent interest. Investing in an issue which is rated badly may cause a delay or even a loss of capital

No tax benefit: Like bank FDs, one cannot get any tax benefit by investing in NCDs.

Longer lock-in period: The 10.50 per cent interest rate on fixed deposits (FDs) are available for bank deposits of one-year tenure and above. However, in the case of NCDs, they come with tenure of three, five and seven years. So an investor has to know what his investment horizon is before going in for such long-term issues. We are nearing the peak of the interest rates and it is good to invest in a long-term debt fund that offers a 11 per cent rate is good.


Trading of NCDs: Despite the longer tenure it is still possible to liquidate an NCD investment, if it is tradeable. The tradeable NCDs would be listed on the stock exchanges and one could sell them whenever one feels that the value of NCD has appreciated to the level expected. But experts say that it is rare as retail debenture trading has not really picked up in India. So, even if an investor wants to sell off his debentures there has to be a buyer.


How to apply for an NCD?


Most NCDs mandate having a demat account to subscribe to an NCD issue. For the subscriber too it is easier as the NCDs can be sold off online when one wants to liquidate them.

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