Non-convertible debentures (NCDs) are fixed income securities listed with major stock exchanges (BSE and NSE) in India. These NCDs can be an option for investors with a moderate risk appetite who are looking for an alternative to bank and corporate FDs. Amit Gupta, managing director, SAG Infotech, said companies issue NCDs, which are fixed-income securities, to raise long-term capital through public offerings. They are issued for a fixed term, such as one to seven years, and interest is paid on a periodic basis or at maturity.
Are NCDs attractive?
Investors can consider investing in such NCDs as the returns from these offerings are high, beat inflation by margins and many of them have good ratings.
Divam Sharma- Founder of Green Portfolio PMS said that investors should check the basics of NCD issuer’s credit rating, profile and track before investing.
There have been some NCD issues in the recent past where 8-11% coupons have been offered. Many NBFCs like Navi, MuthootIndiabulls, Edelweiss, Incred and IIFL had issued their NCDs in recent months.
According to Divam Sharma it makes sense to invest in such NCDs for a long period as the coupon is high and the interest rates are at their peak. Investors should consider names that have good credibility and legacy is not a problem.
Good quality NCDs are available above 10% for a period of 3 years
Manish Jeloka, Co-Head of Products & Solutions, Sanctum Wealth, said that investing in NCDs makes sense as the tax rate would be modest and the post-tax returns would be in the range of 6-7.5%, depending on the tax bracket the investor sits in. Will be based on that. Issuers now need to raise NCDs at a higher rate to refinance their existing debt hence we have good quality NCDs available at over 10% for tenors of 3 years and above.
NCDs and Taxation
from an after-tax perspective, Investment Issuers rated AA and above and offering returns in excess of 9.5-10% are an attractive way to invest, especially after assessing the feasibility of investing in MLDs, said Manish Jeloka
The benefits of having a highly diversified portfolio are well known, and the addition of taxable NCDs helps in portfolio diversification. Amit Gupta said that apart from providing regular cash flow, taxable NCDs also provide protection from the volatile nature of equity markets.
Keep in mind that these NCDs are subject to interest rate and credit risk. Hence, one has to think of NCDs with high ratings, high yield to maturity (YTM) and a lot of liquidity in the markets, Gupta said.
The procedure for issuing NCDs is similar to the IPO procedure
1) Investors apply for NCD shares through a broker.
2) On subscription basis, they get the number of NCD shares.
3) NCDs are credited to the demat account and money is deducted from the trading/bank account.
4) The minimum ticket size for investing in such IPOs is usually Rs. 10000.
5) Most NCDs are listed on exchanges and are traded like equity shares.
6) Many of them are trading with respectable liquidity and close to fair value.
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