Should you be investing in NCDs?
Non-convertible debentures (NCDs) are issued by companies looking to raise money for their business. Like other investment opportunities, NCDs must be evaluated on merit to determine whether they are worth your money. Read this space to know if you should be investing in this investment.
September 25, 2013 / 03:50 PM IST
Non-convertible debentures (NCDs) are issued by companies looking to raise money for their business. Like other investment opportunities, NCDs must be evaluated on merit to determine whether they are worth your money.
Should you be investing in NCDs?
Non-convertible debentures (NCDs) are issued by companies looking to raise money for their business. Like other investment opportunities, NCDs must be evaluated on merit to determine they are worth your money.
NCDs can be secured or unsecured. Secured NCDs have physical assets like the company’s property or plant as collateral. The security serves as a guarantee to investors – in case the company defaults on its obligations, the assets can be liquidated to pay investors’ dues.
Key points to consider before investing in NCDs
1. Company background: If you plan to invest in an NCD, it is only fitting for you to research the company’s background. Look for instances in the past of the company raising money and whether it has met its obligations. Merely going by the brand is not a wise move while investing in NCDs. There have been many instances of established companies defaulting on their obligations. Of course, there are independent rating agencies like CRISIL, ICRA which evaluate companies on these parameters. But investors must also do their own homework. Research of such nature is widely available on the internet and should not be seen as daunting and burdensome. It’s your money and this is the least you must do to protect it.
2. Rate of return: NCDs usually offer a rate of return that is higher than fixed deposits (FD). This is particularly so if it is unsecured. Investors usually go for NCDs due to the higher coupon rate. Ensure that the higher coupon rate is backed by top notch credit rating and security i.e. secured NCDs. If they are not secure, then you must consider whether your risk appetite and investment objectives permit you to invest in them.
3. Interest option: NCDs are available with various options for interest payout with annual and cumulative payout being the most common options. The cumulative option is most rewarding since the interest is reinvested and investors can benefit from compounding. The payout option is suitable for investors who prefer to receive regular income.
4. Taxation: No tax is deducted at source (TDS) in case of an NCD traded on the exchange. The interest income is added to the investor’s taxable income under the head ‘Income from other sources’. The income will be taxed at the marginal rate of tax applicable to the individual. In case the investor exits the NCDs before a year, the income generated is taxed under short term capital gains tax. If he exits after a year and before maturity he will have to pay long-term capital gains tax on the interest income.
Whether NCDs are ideal for you depends on the aforementioned factors. Consult your financial planner on whether the NCD is suitable for you given the rate of return, the rating of the company and its track record and your own risk profile and investment objectives.
- Nirmal Rewaria
(The author is Senior VP & Business Head at Edelweiss Securities)