Non-Convertible Debentures: Definition, Advantages and Characteristics
Definition: Non-convertible debentures (NCDs) are fixed-income instruments that are often issued as a public offering by high-rated corporations in order to accrue long-term capital appreciation. NCDs offer higher interest rate compared to convertible debentures.
Non-convertible Debentures, or NCDs, are a type of debt that cannot be converted into cash.
Non-convertible debentures are financial securities that firms use to raise long-term funding through a public offering.
Due to the non-convertibility of the product, traders are typically provided a larger rate of return than convertible debentures to make the offering more appealing.
NCDs are divided into two types (Non-convertible debentures)
- NCD that has been secured
- NCD with no security
In comparison to unsecured NCDs, secured NCDs have lower interest rates.
Secured NCDs pay interest on a pre-determined schedule, which could be monthly, quarterly, or annually.
If you wish to invest in long-term debentures, another alternative offered by NCD is the cumulative option, in which the interest collected is reinvested and paid at a maturity date.
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What are the advantages of non-convertible debentures (NCDs)?
The following are some of the numerous advantages that NCDs provide to their owners:
Secured NCDs always offer their traders a high NCD interest rate, making them a better investment than other equities.
NCD Investments balance your investment portfolio while providing diversification and income security, whereas other stocks are more speculative and carry more risks.
Tax-saving option: Unlike other equities, no tax is deducted at source. Companies follow the legislation in accordance with Section 193 of the IT Act.
Close whenever you want: You are not restricted by any timetable. You can sell NCD investments on stock markets or use the Put/Call option at any time and from any location.
Unlike stocks, which are controlled by a variety of firms, your money is safe. NCDs (non-convertible debentures) are issued by corporations with a higher credit rating than the RBI’s defined requirements for NCD issuance. In comparison to other stock options, this makes it safe.
Short-term period: There are also short-term NCDs to consider. These issued NCDs in India have a minimum maturity of 90 days.
Compared to savings and other loan options, this is a long-term investment. Long-term NCDs provide a better return on investment over time. NCDs issued in this manner have maturities ranging from 5 to 20 years.
Who should buy non-convertible debentures (NCDs)?
NCDs are based on the success of the stock market. Individuals seeking a steady stream of income can consider investing in NCDs. It also aids in debt portfolio diversification while providing higher yields than bank fixed deposits.
Companies offer NCDs with a specific face value. They are traded on stock exchanges after completing the deal with the lenders.
A person interested in NCDs has two options: subscribe to the offer while it is active or acquire NCDs on the open market. Because NCDs are publicly traded on the Bombay Stock Exchange’s National Stock Exchange, it’s always straightforward to find long-term secured NCDs.
Advantages of NCDs
Major Advantages of NCDs are:
- Returns are higher. Investors in secured NCDs receive a higher NCD interest rate.
- Liquidity is good. On stock markets, you may sell NCD investments or use the Put/Call option.
- There is no tax to pay up front. According to Section 193 of the IT Act, no tax is deducted at source.
- NCDs offer diversification. Diversified portfolio help in managing risks with long term returns.
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