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Know About NCDs

 
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NCDs (Non Convertible Debentures) are debt instruments with a fixed tenure issued by companies to raise money for business purposes. Unlike convertible debentures, NCDs can't be converted into equity shares on a future date.
 
1. What are the advantages of NCDs over traditional debt instruments like fixed deposits?

NCDs offer higher return as com pared to bank fixed deposits. For ex ample, the recently con cluded NCDs of Edelweiss Housing Finance gave returns of up to 10%, Mahindra Finance NCDs in May gave 9%. In comparison, fixed deposits from banks give 7.5-8%. If held in demat form, in terest income from NCDs is not subject to tax deducted at source (TDS). However, taxes are applicable to NCDs if they are held in physical form. As compared to this, if interest in come exceeds `10,000 in a financial year in a bank deposit, it is subject to TDS. Since NCDs are listed on the stock exchange there could be easy liquidity .

 

2. How to invest in an NCD?

Investors can invest in NCDs ei ther during the public issue of fer by submitting a physical form with the details required.Alternatively , they can also apply online through their demat account. They can also look at buying NCDs from the secondary markets that are listed on the BSE or NSE.

 

3. What should you look at before buying an NCD?

Investors need to look at the credit rating, coupon rate on of fer and the credibility of the promoter before investing. Credit rating is done by rating agencies such as Crisil, ICRA and Fitch. If the rating is AAA, it indicates highest quality in terms of timely repayment of principal and interest. Financial planners suggest AAA or AA rating. Lower the rating, higher would be the interest rate. Investors must also compare the interest rate offered by the NCD with other competing instruments such as fixed deposits. Generally , to attract investors NCDs offer 1-2% higher interest rates than bank deposits. There can be various options for interest payout such as monthly , quarterly , half yearly or annually , which investors can choose depending on their cash flows.For NCDs trading on the secondary market, investors need to calculate the yield to maturity , the residual tenure, understand if there is any put or call option before taking a decision. They could also look at the company's financial health, management reputation, past track record before investing.Investors also need to check whether the NCD is secured or unsecured.Wealth managers suggest secured NCDs over unsecured ones.

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