An alternative to fixed deposits can be these non-convertible debentures (NCDs). These can come to the rescue of such investors who are ready to look beyond bank fixed deposits as they are offering higher rates than bank FDs.
What are NCDs?
An NCD refers to a debt instrument issued by a corporation including NBFCs to raise money with an initial maturity of up to one year and issued through private placement. NCDs fall under the debt category and cannot be converted into shares or equities. The interest rate on an NCD is determined by the company issuing the NCD.
Of late, many companies have hit the market with their NCDs and few more are expected from companies. They come in two forms, secured and unsecured NCDs.
Interest rate
At present, NCDs highly rated or AAA-rated NCDs are offering between 9.1% and 10.1% (as per current yield as on December 15, 2021). Higher rated NCDs usually come with higher interest rate.
If the interest rates in the overall economy start to rise, then it is possible that upcoming NCD issues could offer even higher rates than those available now.
Taxation
Interest earned on NCDs during the year is added to your overall income and is thus fully taxable according to your tax bracket. NCDs are beneficial to individuals in lower tax categories.
One advantage of holding NCDs in demat form is that no tax is deducted at source (TDS).
How to invest
A demat account with any brokerage company is required to invest in an NCD. Remember that a discount broker’s demat account will not help. NCDs are offered for only a limited period and may also not be available throughout the year.
Are NCDs safe?
The safety of money invested in NCDs is subject to the ratings and the nature of the debentures. Relying entirely on ratings is not suggested as it has been seen in the past that even highly rated issues have defaulted in repayment of funds. It’s not the company that issues the NCD that gets rated but the issue itself. So, the rating is subject to revision or withdrawal at any time by the rating agencies.
Further, the NCDs themselves can be either secured or unsecured. In case of secured NCDs, the claims of the secured NCD holders are superior to the claims of any unsecured creditors as the former would constitute secured obligations of the company. The unsecured NCDs are not secured by any charge on the assets of the company and will be subordinate to the claims of all other creditors. Hence, even if the unsecured NCDs offer a slightly higher return, avoid them.
Make sure you consider investing in NCDs only after carefully evaluating the company’s reputation, financials, ratings etc. before committing funds to them.
