Why fixed income investors should never ignore NCDs?

Updated: Saturday, June 28, 2014, 9:31 [IST]

There are many investors who hate to experiment. Tell them about a new investment opportunity that he or she could consider and they get wary. Very few fixed income investors could consider instruments beyond the traditional bank and company fixed deposits, when it comes to generating fixed income.

Now, one such instrument that very few investors know about is Non Convertible Debentures (NCDs). There are several companies that come up with Non Convertible Debentures from time to time, including the likes of Shriram Transport, India Infoline, Muthoot Finance etc.

Probably once in a couple of months you would certainly find an NCD issue. Early next month Shriram is likely to come up with its NCD issue, while ECL recently closed its NCD issue.

Now, the one reason to invest in these NCDs is that they offer superior returns than your bank fixed deposits. For example, recent trend suggests that the coupon rate offered on NCDs could range anywhere between 10.5 to 12.5 per cent. Now, this is significantly higher than what bank or company deposits offer.

The tenure of these NCDs could range from 2-7 years, with some schemes virtually offering to double your money in 6-7 years.

Now, apart from interest rate the other concern that investors have when it come to NCDs is liquidity. NCDs are listed on the stock exchanges, particularly the NSE which helps investors sell their holdings. However, it's important to note that NCDs are not very liquid and hence you may not be able to sell in very large quantities.

Another concern has been with regards to security. Some of the NCDs offered by companies are highly rated by the rating agencies and hence the default chances are minimal. So far one has not heard of any default on the interest or principal amount payable on a NCD.

If you are not able to buy a NCD because there are no offerings, you could also consider buying them from the stock exchanges and if the price is low, your return could be even higher. Also remember that there is no TDS on interest on NCDs if you hold them in the demat form. However, interest earned is not tax free and you have to add the interest component while filing tax returns. If you sell the NCDs on the stock exchange and you make a profit, you are liable to pay capital gains tax.

Conclusion

NCDs offer an opportunity for higher return than bank deposits and are even better than company fixed deposits when it comes to returns. They are relatively secure, though we cannot say they are fully secure. Also, no TDS is applicable if the NCDs are held in the demat form making them even more attractive. Also read 4 listed NCDs that investors could consider

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