What is
NCD and what makes it so attractive
NCD is a fixed income instrument Apart from taking bank loans
Corporates, NBFCs raise money through issuing debentures. It is a financial
instrument issued by corporates to support their business needs. There are two
type of debentures, convertible debentures and non-convertible debenture.
Convertible debentures are unsecured bonds and can be converted into equities
or stocks at a future date as specified by the issuer.
NCD is financial instrument used for taking loan from the financial
market. It cannot be converted into equity shares of the issuer in a future
date, hence it offers higher interest rate. The NCD offers atleast 1.5 – 2%
higher interest than any fixed deposit by a reputed bank and company deposits. NCDs
come in both secured and unsecure form, secured #NCDs are backed by assets.
Unsecured NCDs entails higher risk.
Added Edge
1. What makes it more attractive is, in the falling interest
regime, the bond prices may surge, hence the value of the funds.
2. No TDS deducted on the demat form of investment (physical form
does)
Points for the new investors
1. Once you come to know about a new NCD offer, check with your
stock broker for online application.
2. Like any other IPO, it has a NCD comes with opening and closing
dates
3. NCD offers coupon rate. Coupon rate is the interest rate paid
on a bond by its issuer for the term of the security. For example, if a NCD
issue comes with a face value of Rs. 100 and coupon rate 10%, the interest
earned will be Rs. 10 per annum. However, in the tenure if the NAV price falls
or surge, it will have no impact on the interest pay out, it will continue as
Rs. 10 per year throughout the tenure. Hence, coupon rate is fixed on the offer
price and continue through maturity
4. Check for the credit rating allotted by #ICRA, #CRISIL, #CARE
(triple A rating Suggest good financial health of the issuer, double A may give
higher coupon rate, triple A ensures safety of your capital)
5. NCDs are also traded on stock exchanges. Apart from the new
offers, investors can also buy exiting NCDs through stock exchanges, however,
one need to be double careful and seek guidance from financial planner.
6. Interests are generally paid through direct credit, RTGS, ECS
and NEFT mode. It may offer monthly/ quarterly/ annually/ cumulative options.
7. Tax – The investment is taxed at short term (less than a year)
and long term (debt investment more than a year are taxed at 10%) depending on
the holding period. The interest will be taxed as per the tax bracket of the
investor.
8. This is as liquid as a bank fixed deposit. However, there is no
penalty fee for pre-mature withdrawal of this investment
9. Additional Features – Some NCD public issues offer special rate of
interest to Senior citizens or to shareholder.
Pros
1. It’s #liquidity is as good as any fixed deposit in bank, which
has a specific tenure but can be withdrawn any time. However, FD may charge a
penalty fee on interest accrued.. but incase of NCD, there is no penalty.
2. If it is compared with company fixed deposit, company deposits
(a popular instrument in the senior citizen segment with 0.25- 0.50% extra
interest)comes with various conditions for pre-mature withdrawal, for eg –
lock-in periods, penalties etc.
3. NCDs come with Rating from #ICRA #CRISIL #IndiaRatings #CARE
which gives a clarity to the investor on the risk involved, higher the rating,
lower is the risk (AAA being the highest category, followed by AA, A, A-, BBB
and so on)
4. Incase of bankruptcy, NCD holders get preference over
shareholders
Cons
1. Incase interest rate increase, the value of the NCD may fall,
sometimes even below the Face Value.
2.
Though, the instrument can be traded on the exchanges, one may not find a buyer
for NCDs if the trade volumes on bourses are low.
No comments:
Post a Comment