What are Non-Convertible debentures ? | RR Finance
In the world of investments, diversification is the cornerstone of prudent investing, and allocating a portion of your portfolio to debt is a key strategy in achieving this balance. Debt instruments like Nonconvertible debentures (NCDs) offer stability and fixed income, which can balance out the volatility in equity or other market-based instruments. The debt allocation can cushion your portfolio during rough patches in the markets and help you build a more stable and resilient portfolio while keeping risk in check.
Understanding Nonconvertible Debentures(NCDs)
Nonconvertible debentures, or NCDs in short, are the best way to have exposure to debt. Nonconvertible Debentures are used by companies to raise money. NCDs typically offer higher returns which appeals to investors looking for fixed returns with low levels of risk.
Investors buy NCDs with a fixed face value, and until maturity, they receive regular interest payments, for example semi-annually or annually. When the debt matures, the issuing company pays the investor back the principal amount, fulfilling the debt commitment.
NCDs are a desirable investment option due to their many features and attributes
(i) Fixed Returns : The guarantee of fixed returns throughout the investment period is one of the main draws of NCDs. Investors who are risk averse and want steady income will find this steadiness appealing.
(ii) Non-convertibility : NCDs cannot be converted into equity shares, in contrast to convertible debentures. Investors know in advance what their returns will be.
(iii) Secured : NCDs are of two types secured and unsecured. In case of secured nonconvertible debentures (NCDs), the issuer pledges a specified value of assets as collateral or security. In the event of adverse circumstances leading to the company's inability to meet its obligations towards NCD holders, these assets are utilized to fulfill such obligations.
(iv) Credit Ratings : NCDs get their credit ratings from rating agencies which indicate the creditworthiness of the issue and issuing corporation. These ratings play a crucial role in helping investors make informed decisions. Higher-rated issuers typically offer lower interest rates, reflecting the lower risk associated with their debt.
(v) Maturity Period : NCDs have set maturities that can be anywhere from short to long-term. Investors can select a maturity period based on how well it fits their financial objectives and investment horizon.
(vi) Liquidity : Nonconvertible Debentures provide a certain level of liquidity through secondary markets where investors can purchase and sell their NCD holdings, while not being as liquid as equities.
How NCDs are different from traditional fixed deposits
| Particulars |
NCDs |
Fixed Deposit |
| Returns |
Offer Fixed returns which are generally higher than FDs . |
Offer Fixed returns which are not very attractive and less than NCDs . |
| Liquidity |
Offer higher liquidity than FDs as they are listed in secondary markets. |
Offer lower liquidity as once FD is booked you cannot sell it or withdraw money without charges. |
| Penalty at Withdrawal before Maturity |
If you sell the NCDs in the secondary market before maturity you pay no penalty. |
If you withdraw the money before maturity, you have to pay a penalty. |
| Capital Gains |
NCDs offer the possibility of making a capital gain if the interest rates in the market go down. |
FDs don’t have any possibility of making a capital gain. |
| Flexibility |
NCDs offer a wide variety of tenures, interest rates, and issuers to choose from, this provides investors with flexibility in investment decisions. |
FDs offer no such flexibility to the investors as investors have to choose from limited options. |
Navigating the Landscape of NCDs with RR Finance
Our team at RR Finance carefully examines the NCD market to find possibilities that fit the risk profiles and investment goals of our clients. We give our clients the tools they need to make wise decisions about NCD investments with our individualized approach to investment advice. RR Finance provides specialized solutions to assist you in reaching your financial objectives.
Get in touch with us right now to start your path to financial success with assurance and confidence.
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