A Simple Guide to Non-Convertible Debentures
A bank fixed deposit is a safe and lucrative investment idea because it provides a fixed and assured return on investment. However, the rate of interest offered by banks is low and hence not the best investment option. Hence, low-risk investors with the need for assured return but at a higher rate can opt for the investment product called debenture. A Debenture is a type of debt instrument that is not secured by physical assets or collateral by the issuing financial institution. Debentures are the highest common form of long-term loans that can be taken by a company. These loans are repayable at a fixed rate of interest and fixed duration.
Debentures are of two types: convertible and non-convertible.
Convertible Debentures are the ones that can be converted into equity shares of the issuing company after a specific period of time. These types of bonds are attractive to investors owing to the ability to convert, however, they offer a lower interest rate.
This financial product cannot be converted into equity shares and once the maturity period comes to an end, the principal amount along with accumulated interest is paid to the debenture holder.
NCDs are also of two types: secured and unsecured. Secured redeemable non-convertible debentures are backed by the assets of the debenture issuing company and if the company defaults in payment, the investor can liquidate the assets to claim the payment.
Benefits of Non-Convertible Debentures
It offers a high rate of return and though they cannot be converted into equity shares at a later point of time, they can be traded on stock exchange. So, if one wants to liquidate the debenture, one can do so and get back the money which is not the case with bank fixed deposit. This is why non-convertible debentures come across as a smart investment idea and of late, people have been investing in them in larger numbers.
Risks Involved in Non-Convertible Debentures
They do not give one any ownership in the company like shares. Also, they do not give favorable returns during a recession if one wants to sell them before the maturity period. Last but not the least, the returns on NCDs are taxable and the debenture holders have to pay taxes according to the income tax bracket in which they fall. This applies in the case of a pre-maturity period sale as well.
Why You Should Invest in NCD?
NCD investment is considered beneficial by many investors. NCD has been gaining popularity as people do not want to be limited to fixed bank deposits. These debenture markets are expanding and there are many companies that issue debentures from time to time as a means to raise capital.
So, it can be said that non-convertible debentures are a smart and lucrative financial product. NCD investment makes sense for individuals looking to get higher and assured returns. Nevertheless, one must do a thorough research regarding the general creditworthiness and reputation of the issuer before investing in an NCD to ensure the security of one's Investment.