Now, investors are constantly looking for investment options that offer a balance between returns and stability. While FDs and mutual funds are commonly known to invest, another option gaining attention is secured NCDs. Their investment vehicles are often considered by investors seeking fixed-income opportunities with potentially higher returns than traditional deposits.
But before you invest in NCD products, it is important to understand how they work, their features, and what to consider before investing.
Non-Convertible Debentures (NCDs) – An Overview
NCD stands for Non-Convertible Debentures; they are a fixed-income financial instrument issued by companies to generate capital from investors. In return, they pay investors a fixed rate of interest over a specific tenure.
Unlike a convertible debenture, an NCD cannot be converted into company shares or equity. Investors receive interest pay-outs during the investment period and the principal amount at maturity. NCDs are generally offered for different tenures and interest payment options, including monthly, quarterly, annual, or cumulative pay-outs.
What makes a Secured NCD different?
The issuer’s assets back a secured NCD. This means the company pledges certain assets as security against the money raised through the issue. In case the company faces financial difficulties or defaults, secured NCD holders have a claim on those assets. This security feature is one reason why many investors prefer secured NCDs over unsecured debt instruments. The value and quality of the underlying assets, along with the financial health of the issuing company, remain important factors to consider before investing.
How do secured NCDs work?
When a company issues secured NCD non-convertible debentures, investors subscribe to them by investing a certain amount. In return:
• The company pays a fixed interest rate: Investors earn pre-decided returns throughout the investment tenure, depending on the pay-out option selected.
• Interest is credited periodically or at maturity: The issuer may pay interest monthly, quarterly, annually, or along with the principal amount at maturity.
• The principal amount is repaid after the tenure ends: Once the NCD reaches maturity, the investor receives the original invested amount back from the issuer.
For example, if an investor chooses a five-year secured NCD with annual interest pay-outs, they receive interest every year and the invested amount back after five years. Many NCDs are also listed on stock exchanges, allowing investors to buy or sell them before maturity depending on market conditions and liquidity.
Why Do Investors Consider NCDs?
There are several reasons why investors choose to invest in NCD instruments:
• Potentially higher interest rates compared to fixed deposits: NCDs may offer better returns than traditional bank fixed deposits, depending on the issuer and market conditions.
• Fixed and predictable income: Since the interest rate is generally fixed, investors know the expected returns in advance.
• Multiple tenure options: NCDs are available across short-term and long-term durations, giving investors flexibility based on their financial goals.
• Flexibility in pay-out frequency: Investors can choose interest pay-out options according to their income preferences and financial planning needs.
• Tradable on exchanges in some cases: Listed NCDs can be bought or sold on stock exchanges before maturity, subject to market liquidity.
Things To Check Before Investing
Before investing in an NCD debenture, investors should evaluate:
• Credit ratings assigned by rating agencies: Credit ratings indicate the issuer’s ability to repay investors and help assess the overall credit quality.
• Financial strength of the issuing company: Reviewing the company’s financial performance and repayment history can provide better investment clarity.
• Interest pay-out structure: Understanding whether payouts are monthly, annual, or cumulative helps investors align investments with their cash flow needs.
• Lock-in period or liquidity: Some NCDs may have limited liquidity, making it important to check exit options before investing.
• Whether the NCD is secured or unsecured: Secured NCDs are backed by company assets, while unsecured NCDs rely solely on the issuer’s repayment ability.
Final Thoughts
Secured NCDs can be a useful addition to a diversified investment portfolio for investors looking for fixed-income opportunities. Since these instruments are backed by company assets, they may provide additional comfort compared to unsecured debt products. Understanding the issuer’s credibility, credit rating, and repayment ability is essential before deciding to invest in NCD offerings.
