Non-convertible debentures(NCDs) are a financial instrument that is used by companies to raise long-term capital. This is done through a public issue.
NCDs are a debt instrument with a fixed tenure and people who invest in these receive regular interest at a certain rate.
The rate of return on NCDs is around 11-12%. This is high compared to most investment options. For example, fixed deposits (FDs) are another popular avenue where people put their money for regular returns. However, the returns are much lower.
There are various interest payout options including monthly, quarterly, semi-annually and annual payments. The maturity period for an NCD can be anywhere between 90 days to 20 years. This gives you the flexibility to choose between short and long tenures based on your investment goals.
Since they are listed on the stock exchanges, NCDs are easy to withdraw. Redeeming your NCD investment may be a little tougher than selling regular stocks, but they are more liquid than bank fixed deposits.
Important terms you should know:
Secured and unsecured NCDs
An NCD can either be secured or unsecured. A secured NCD is backed by the issuing company’s assets. This means that the company has to fulfill its debt obligation whatsoever. However, that’s not the case for unsecured NCDs. This makes secured NCDs safer since they have lower default risk.
If you seek to buy NCDs, it is very important to know the rating of the debenture before you buy it. Every company that seeks to raise money through an NCD is rated by agencies such as Fitch Ratings, CRISIL, ICRA, and CARE. These rating agencies rate the company based on its ability to service its debt on time. So, a lower rating means a higher credit risk.
A non-convertible debenture is simply a debt instrument used by a company when it wishes to raise money from the public. The company issues a debt paper for a specific tenor. During this period, it pays a fixed rate of interest to the buyer. This could be on a monthly, quarterly, or annual basis. At the end of the tenor, the money that is invested is returned back to the buyer.