Non Convertible Debentures or NCDs are debt (fixed income) instruments that are issued for fixed maturity. NCDs shall be issued at face value and will carry a coupon rate as determined by the issuer. Normally redemption periods of these instruments range from 3-10 years. These instruments offer coupon rate ranging from 11-12%. Investors have the option to exit from these instruments before full tenure by selling in the secondary market, when these instruments are listed on exchanges.
In the recent past, companies such as State Bank of India, L&T Finance, Tata Capital, Shriram Transport Finance and NBFCs like India Infoline Investment Services Ltd., Shriram City Union Finance, Manappuram Finance have raised funds through this route. Non-banking finance companies are rushing to raise funds through non-convertible debenture issues thereby giving an attractive opportunity for investors to park their funds for yielding better returns.
Taxation: No tax will be deducted at source as these bonds are issued in demat form and are listed on the exchange. The interest income will be taxed under “income from other sources”, and will be brought to tax at the respective income tax slab rates.
Rating: A credit rating given to NCDs indicates their credit quality. Private independent rating services such as CARE, CRISIL provide evaluations of respective issuer’s financial strength, or its the ability to repay a bond’s principal and interest during the stated time period.
Performance: Fixed Deposits with the similar tenors offer interest rate varying 8.5-9.5% where as NCDs offer 11-12% interest rate. There is a inverse relationship between the interest rate and price of the bond. When the interest rate goes up the value of the bond goes down and when the interest rate goes down the value of the bond goes up. Thus when the interest rate cycle nears peak, investors from investing in bonds/debentures may benefit from the stabilization and the subsequent fall in the interest rates.
Investment Rationale: NCD gives an attractive opportunity for the investors to yield a return ranging 11-12% better than the 9-9.5% return on fixed Deposits. Investors may allocate a minor proportion of their portfolio in these fixed income securities inorder to benefit from the capital appreciation once RBI starts reducing the interest rates.
You can invest in these NCDs through many popular stock brokers like Inditrade.