Ncd Investment Wiki

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Non-Convertible Debentures (NCDs) are fixed-income instruments companies use to raise capital. Unlike convertible debentures, NCDs cannot be converted into equity shares. They offer a fixed rate of interest, making them appealing to investors seeking predictable returns. Understanding NCDs is crucial for making informed investment decisions.

Key Features of NCDs:

  • Fixed Income: NCDs pay a pre-determined interest rate (coupon rate) over a specific tenure. This provides a consistent stream of income, which is particularly attractive to risk-averse investors like retirees.
  • Higher Interest Rates: Typically, NCDs offer higher interest rates compared to traditional fixed deposits offered by banks. This is because NCDs often carry a higher risk, reflecting the financial stability of the issuing company.
  • Tenure: NCDs have varying tenures, ranging from a few months to several years. This allows investors to choose tenures that align with their investment goals and time horizons.
  • Credit Rating: NCDs are rated by credit rating agencies like CRISIL, ICRA, and CARE. These ratings assess the issuer’s ability to repay the principal and interest, providing investors with an indication of the creditworthiness of the NCD. A higher rating signifies a lower risk of default.
  • Liquidity: NCDs can be traded on stock exchanges, offering liquidity to investors. However, the liquidity can vary depending on the demand for the specific NCD.
  • Taxation: The interest earned on NCDs is taxable according to the investor’s income tax slab. Additionally, if NCDs are sold before maturity, any capital gains are also subject to tax.

Investing in NCDs:

Before investing in NCDs, it’s essential to conduct thorough due diligence:

  • Assess Credit Rating: Pay close attention to the credit rating assigned to the NCD. A higher rating indicates a lower risk.
  • Evaluate the Issuer: Research the financial health and track record of the company issuing the NCD. Consider factors like profitability, debt levels, and management quality.
  • Understand the Terms: Carefully read the prospectus to understand the terms and conditions of the NCD, including the interest rate, tenure, redemption terms, and any associated risks.
  • Diversify Your Portfolio: Do not allocate your entire investment portfolio to NCDs. Diversification helps to mitigate risk.
  • Consider Your Risk Tolerance: NCDs are not entirely risk-free. Assess your risk tolerance and investment goals before investing.

Risks Associated with NCDs:

  • Credit Risk: The issuer may default on interest payments or principal repayment.
  • Interest Rate Risk: Rising interest rates can decrease the market value of NCDs.
  • Liquidity Risk: Difficulty in selling NCDs before maturity can lead to losses.

In conclusion, NCDs can be a valuable addition to a diversified investment portfolio, offering a fixed income stream. However, it is important to understand the associated risks and conduct thorough research before investing.

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