Non-Convertible Debentures (NCDs) are fixed income securities listed with major stock exchanges (BSE and NSE) in India. These NCDs can be an option for investors with a medium risk tolerance who are seeking for alternatives to bank and corporate FDs. Amit Gupta, MD, SAG Infotech said corporates issue NCDs, which are fixed income securities, to obtain long-term capital through public offerings. They are issued for a set length of time, say one to seven years, and pay interest either on a periodic basis or at maturity.
Are NCDs attractive?
Investors can look at investing in such NCD’s as the yields from these offerings are high, beats inflation by a margin and many of them have comfortable ratings.
Divam Sharma- Founder at Green Portfolio PMS said that investors should however check the basics of credit ratings, profile and track of NCD issuer before investing.
There have been some NCD issues in the recent past where offered 8-11% coupon. Many NBFC’s like Navi, Muthoot, Indiabulls, Edelweiss, Incred and IIFL had issued their NCD’s in the recent months.
As per Divam Sharma investing for long term in such NCD’s makes sense as the coupon is high and interest rates are nearing their peak. Investors should consider names where there is good credibility and no legacy issues.
Good quality NCDs available above 10% for a tenor of 3 year
Manish Jeloka, Co-head of Products & Solutions, Sanctum Wealth said it makes sense to invest in NCDs as the tax rate here would be marginal and post-tax returns would range from 6-7.5% depending on the tax bracket the investor sits in. The Issuers to refinance their existing debt need to raise NCDs now at a higher rate hence we have good quality NCDs available above 10% for a tenor of 3 years and above.
NCDs and taxation
From a post-tax perspective, investment in Issuers rated AA and above and offering returns in excess of 9.5-10% are an attractive avenue to invest specially after viability of investing in MLDs is no longer an option, said Manish Jeloka
The advantages of having a highly-diversified portfolio are well known, and the addition of taxable NCDs helps portfolio diversification. In addition to providing regular cashflows, Taxable NCDs also provide security from the erratic nature of equities markets, said Amit Gupta.
Keep in mind that these NCDs are subject to interest rate and credit risks. So, one has to think about NCDs with a higher rating, greater yield to maturity (YTM), and plenty of liquidity on the markets, added Gupta.
NCD issue process is similar to the IPO process
1) Investors apply for NCD shares through a broker.
2) Based on the subscription, they receive the number of NCD shares.
3) The NCD’s are credited to the demat account and the money gets deducted from the trading/bank account.
4) The minimum ticket sizes to invest in such IPO’s are usually Rs. 10000.
5) The majority of NCDs are listed on exchanges and traded similarly to equity shares.
6) Several of them are traded with respectable liquidity and at prices that are close to fair.